Oral evidence: Spring Statement 2019, HC 2056

Oral evidence, 3 April 2019.

Witnesses

Torsten Bell, Paul Johnson, Gemma Tetlow and Martin Wheatley.

Chair

Good morning and welcome to our panel for our next session on last month’s spring statement. I am going to ask the panel to introduce themselves. Mr Bell, let’s start with you.

Torsten Bell

I am Torsten Bell, director of the Resolution Foundation.

Paul Johnson

Paul Johnson, director of the Institute for Fiscal Studies.

Gemma Tetlow

Gemma Tetlow, chief economist at the Institute for Government.

Martin Wheatley

Martin Wheatley, senior fellow at the Institute for Government.

Chair

Thank you all very much for being here. We have quite a lot of ground to cover and, obviously, an experienced panel, so we will try to direct questions to particular panel members. Of course, if people want to add to answers, that would be great. If we can keep answers relatively short, that will mean we can all get through as much ground as possible. I want to start with the fiscal headroom, with questions particularly directed to Torsten and Paul. Obviously, there were improvements in the public finances set out in the OBR’s Economic and fiscal outlook. Looking ahead to the spending review, what ability does that give the Chancellor to spend more on non-protected Departments over the spending review period, assuming he continues to aim for a modest deficit rather than a balanced budget?

Paul Johnson

That leaves him with a reasonable amount of headroom, actually, if he is not aiming for budget balance in the mid-2020s but is satisfied with something below 2% of national income. Even when you take account of the possible changes to the student loan finance arithmetic, that still leaves him with a good £15 billion a year going out on current forecasts, if that is what he wants. Of course, we do not know what fiscal rule he will set, because the current one—the 2% of national income—is only for next year, and we do not know how he will respond to the change in the student loan finances. With a deficit of that kind of level and current forecasts, that is just about consistent with debt falling over time. That is sort of the impression he gave of what his focus would be into the medium run—to have debt falling over time. Of course, within all this there is huge uncertainty with respect to the macro outcomes and the public finances, but on current forecasts I think there is enough money there to move reasonably decisively to spending rising, not just in real terms but per capita and as a fraction of national income, should he want to do that.

Chair

Torsten, do you agree?

Torsten Bell

Yes, I agree with all of that. You need about £10 billion to stop unprotected Departments being cut as a share of the economy. He can easily do that, and then the big fiscal question we are moving into in the 2020s is, “How fast do you want to see debt falling?” versus, “How much of the lost ground in terms of cuts since 2010 do you wish to reverse?” That is the debate. We are no longer debating how fast the deficit should fall, or austerity versus spending increases. The debate is, “How fast do you want debt to fall, and what does that let you do in terms of recovering the lost ground for the Departments that have seen big cuts in the last decade?”

Chair

We heard from Treasury officials last week, and we have the Chancellor coming in the next couple of weeks. I asked about the size of the deficit—this issue of a balanced budget. Clearly, he is making a choice that it does not have to be balanced in order to give him more headroom. Do you think there is an argument that the charter for budget responsibility should therefore be updated? Should Parliament be told that, actually, this is a change in policy?

Torsten Bell

I think you may have made your mind up on that. That would be a reasonable conclusion to come to. There are several issues with the charter. One is that it does not give you much foresight to the future beyond this slightly silly projection of a surplus, which the Government have not made any actions to try to meet. I would say the second issue is that the charter, as it stands, is not remotely updated for a world of very low interest rates where fiscal policy is going to have to play a more active role in stabilising the economy if we see a serious recession. You probably would want it updated for that technocratic reason—it is out of date and has a target they are not actually aiming for. Blindingly obviously, the target they are aiming for is falling debt, so spelling out that that is what the objective really is would be sensible today. Then I would update it more fundamentally to take into account the question, “How does my fiscal framework respond to an era of low rates where I will have more crisis spending on the fiscal side but then maybe need a different approach during the good times?”

Chair

Paul, do you agree with that?

Paul Johnson

Yes, broadly speaking. It is not really giving us any kind of anchor at the moment, and something that is focused on long-run debt is the right way to go. There is a case for some consultation over this. It is not a straightforward thing to come up with, and some input into that process would be quite helpful.

Chair

Looking ahead, obviously there was not a lot in the spring statement, so we are also going to cover the forthcoming spending review a bit. We hear that how comprehensive the spending review is will depend on what happens with Brexit, but let’s assume that it is fairly comprehensive. You have said that there is a possibility of non-protected Departments having proper increases, but let us imagine that that is not the case and there is a difficult decision to be made on further reductions in their budgets in the 2019 spending review. Would you like to speculate on which ones the Treasury would consider to be the non-protected Departments still? Torsten, do you have a view on that?

Torsten Bell

The first thing to say is that I think that is very unlikely to happen. I don’t think any Chancellor, with the many options available in the next year, is going to be reducing many Departments’ budgets in the years ahead. Remember: some Departments are having big cuts in the year about to start, on Saturday. For example, I think the 8% cut to the Ministry of Justice is still going ahead. Local Government is still facing tough times. There is a reason why councils are putting up council tax by 5% this year. I am not saying that an individual Department won’t be affected, but it’s hard to believe that you will be seeing cuts across a big range of Departments, not least because, as I said, there is headroom, particularly in real terms. In real terms per capita you only need £3 billion to stop the cuts to unprotected Departments. A Chancellor is going to do that.

Chair

Any speculation, Paul, on any Departments that might lend themselves to being not protected if things don’t look so good?

Paul Johnson

Who knows? It’s hard to see. All those that are not officially protected have had big cuts up to now. We have seen very big cuts in Local Government, which often tends to mop up at the end. But I can’t really see significant cuts additionally to Local Government, given how much they are struggling with things like social care. I think that, exactly as Torsten said, it’s not impossible that there will be some, but I would not like to speculate on where those cuts might come.

Chair

We will turn to Gemma and Martin on the spending review. Obviously, a number of Departments have faced 10 years of reductions in real-terms spending. From the point of view of the IfG’s analysis of that, to what extent have those been made through efficiency savings, without reducing performance and restricting delivery?

Gemma Tetlow

We publish a performance tracker each year looking at nine major areas of public services, and our general conclusion from that is that all those public services have, to a greater or lesser extent, managed to make some efficiency savings. There have been some obvious common ways in which that has been achieved—for example, by holding down the pay of public sector workers, so that has grown less quickly than inflation has over the period. But the picture is mixed across Departments. There are some, like the Prison Service, where it’s quite clear that those areas have not been able to make the efficiency savings needed to deliver the same quality of service within the budget that was set. You can see that in rising levels of prison violence and self-harm, for example. In other areas, like adult social care, what seems to have happened is that the number of people receiving those sorts of services from local councils has been cut back. Although councils have prioritised spending on that area compared with other neighbourhood services, actually they have not been able to meet all the demands that they have faced over the period. The area where perhaps we have seen least pressure so far is schools, because broadly speaking, at least up until a couple of years ago, spending did rise in line with pupil numbers, so while schools are picking up some additional pressures on some pastoral activities, they have not perhaps seen quite the same pressure as other areas of services and so have not been under quite the same pressure to find efficiency savings. As I have said, broadly speaking, there is evidence of efficiency savings in lots of areas, but there is also growing evidence that services are struggling to make the further savings needed to not have an effect on the quality or scope of services.

Chair

I was going to ask you about that. We have heard that it seems unlikely, given the finances, that a Chancellor will make a decision to have further cuts in real-terms spending for Departments, but would the IfG’s view be that if that were the case, it would be very difficult, if not impossible, for Departments now to avoid a fall in the quality of delivery of public services?

Gemma Tetlow

I would not say impossible, but certainly the easy efficiencies have been made and we are now in a place where, to make savings, you would need to think more about significantly changing the way in which you deliver a service, rather than simply trying to squeeze at the margin how much you are paying for the inputs. For example, in relation to adult social care, councils have tried to push down the costs that they are paying to providers for that, and that is starting to cause problems in the private provider market. Those sorts of marginal adjustment are becoming more difficult.

Wes Streeting

Good morning. I will begin with Gemma and Martin. My first question is, how cynical should we be about this spending review, and to what extent is the outcome of the spending review predetermined by the Treasury before they have even read a single submission from Departments?

Chair

That’s not a leading question in any way!

Martin Wheatley

There is a big thing that hangs over the spending review. The Chancellor set out his plans for the spending review but with the enormous caveat that it was dependent on an orderly Brexit.

Wes Streeting

And how’s that going?

Martin Wheatley

It’s not quite in the bag yet, as you may have observed. I am not sure that, Department by Department, it is completely predictable. Some things clearly have been nailed down in spending terms, such as the Health settlement, but there is still room for choices to be made. How much of that is down to political haggling, as has tended to be the case with spending reviews as opposed to a more systematic analysis that technocrats such as me are enthusiastic for, we do not know. It says it will put out some guidance and get the Departments’ ideas in before the summer recess, with an announcement in the autumn. One interesting thing compared with 2010 and 2015 is that the Treasury signals that it has a very strong interest in outcomes and results, which we at the IfG have been arguing for some time. Some of the problems that Gemma was talking about are, in our view, the consequence of the 2010 and 2015 spending reviews not paying enough attention to that. In terms of something not being a foregone conclusion, it is talking about the zero-based review of capital spending. If it really is a zero-based review, by definition it is not a foregone conclusion.

Torsten Bell

Just to reinforce what Martin said, it is definitely too cynical to think it is a foregone conclusion for a number of reasons: we do not know who the Chancellor will be and we do not know who the Prime Minister will be. Even this Chancellor has said he does not know how much he wants the overall spending envelope to be, and he has shown a willingness to change that significantly in the last few fiscal events. I do not think the Treasury has already made a plan that it will give to any political leadership team and say, “This is what we are doing.” That is particularly true if it tries to go ahead with the three-year spending review next year on a very tight timetable. If we see a change in the Prime Minister and the Chancellor ahead of then, clearly there are a lot of political decisions that can be made. This is the change of the era—this is the spending review that moves us from the cuts era in to how far you should increase and where you should increase, and it is the spending review that starts to face the demographic headwind into the 2020s. There are big decisions to be made about the direction of travel for our public services in a way that was not true in 2015, when basically we did more of the same.

Wes Streeting

A few things arise from both answers. First, Torsten, you spoke about the potential fiscal headroom. In that context, and I am interested in the views of all the panel, is the notion of protected Departments useful any longer, in the context of that headroom and, as Torsten said, moving from an era of cuts to thinking about investing in departmental budgets?

Torsten Bell

I would split your “protected” into two categories: there is politically important—think pension spending circa 2010—and, “I want to prioritise this and for it to be seen to be prioritised.” Then, there is “this area has significant cost pressures driven by the state of Britain, not by politics,” to which I mean social care and healthcare spending. As we enter the 2020s, the pressure is coming not just on an ageing population putting up healthcare costs, but on healthcare costs themselves rising faster than the growth of the economy. That is where the push factors are coming from. There are others, such as how much push factor there is from the legacy of huge cuts to the prisons budget over the last few years. That is the decision you will face, not “protected” in some simplistic sense of whether it is Education, Health, Defence and Aid, which we have had before. Aid goes into your political priority box. Where are the new political priorities? I would have thought they would be different. Secondly, where are the cost pressures that Britain, not politics, is giving you?

Paul Johnson

I broadly agree with that. We know what the Health outcome is going to be; we essentially know what the Defence and Aid outcomes are going to be, given the targets. In a sense, in terms of the arithmetic of the spending review, there still are those three, and then everybody else is arguing about the rest. I cannot see anything significant happening on those three, although I suppose there could be a bit more for Defence. Then it will be a question of looking at the priorities there. I agree with Torsten; I am sure the answer is not yet already worked out and there is a big spreadsheet in the Treasury and a lot of different numbers you could put in there to come to the same answer at the end. Those numbers will probably move around until the very last moment when the announcements are made, and they will be determined by a combination of the underlying pressures, the evidence on what works and the political trading that results in that.

Gemma Tetlow

To build on that, we are in quite a different world from 2010 and 2015. In both those cases, there was a clear fiscal objective, and alongside that was a necessary spending envelope to meet that borrowing objective. You then protected a load of Departments, and that left other Departments basically haggling over what was left. As Paul alluded to, Local Government ended up being the balancing item. This time, we are in a different place. First, we have set out some NHS spending plans, but it will be a lot harder to try to make those bottom-line numbers add up by taking money away from the other, unprotected Departments. This time, there seems to be more of a decision to be made about what we can realistically expect from these other services and the type of demand pressures that Torsten was referring to. Therefore, the adjustment is also on that fiscal objective at the same time and not just on the budgets of the unprotected Departments.

Wes Streeting

Before I turn to Martin, I am interested in both of your opinions on this: you mentioned that IfG has been a strong advocate for outcomes-based indicators as a means of measuring the effect and impact of public spending and the performance of Departments. You mentioned the advocacy for that approach, but what do you anticipate will be some of the challenges of adopting such an approach? How practical will it be to hold Departments genuinely to account for outcomes in that respect?

Martin Wheatley

Of course it is not easy, but the UK has had experience in the past of trying to plan and then hold Departments to account for outcomes in the 1997 to 2010 era, and at times it has achieved some success. The critical factor in all that was not really a technical one; it was that there was strong political commitment to taking outcomes seriously as well as financial inputs, and good systems and structures in central Government for holding Departments to account and working out how to overcome problems. If I can add a point to what colleagues have said about protected and unprotected Departments, that is part of a bigger problem with how public spending planning tends to be done, which we very strongly think should be addressed in this review. The result of the whole Department-by-Department approach is that, if you squeeze in one place, cost pressure bulges out somewhere else. We really hope that this spending review, rather than making rather arbitrary decisions about how much money to put in this Department or that one, will start to look at those chains of cause and effect across the public sector and make some good decisions about how to spend the money to improve outcomes.

Wes Streeting

That leads me very happily to the next question I wanted to ask, which was specifically about the issue of pooled funding arrangements. Two weeks ago, Treasury officials told us that in the spending review they aim to reduce the silo effect and encourage joint working between Departments, but we have already seen examples, such as the conflict, stability and security fund, being criticised for being opaque and lacking accountability. While I strongly agree with what you have just said about the futility of silo-based funding and decision making, how do we encourage joint working at the same time as ensuring that there is still transparency and accountability?

Martin Wheatley

The first thing to say is that you need to get this right at two levels. These discussions are often about accountability at a national level, but it is important, if you are trying to get public services working towards outcomes, to start, in a sense, by looking at local public services and how, for example, on an issue like knife crime, the police, youth services, Health and Education are working together and how the accountability might be improved at local level as well as national. There are models the Government could use and the IfG has published work on this in the past. One approach is to assign a budget to a cross-Government unit, as was done, for example, on rough sleeping in the Blair era. That gives clear accountability but may also reduce buy-in from Departments, and doesn’t, in and of itself, get round the problem of local services not being joined up. Or you can have pooled budgets across Departments. You mentioned conflict prevention; it has been tried for drug treatment as well. It is better for driving collaboration, if it can be got up and running, but it seems to take a lot of difficult negotiation to make it work. As we say, there can be a problem about opaque accountability.

Wes Streeting

Anything to add on that from the rest of the panel?

Torsten Bell

Briefly, what does history tell us about attempting to deliver outcomes rather than budgets? There is not a bureaucratic answer to this. Political leadership that visibly cares about the outcome is what overcomes silo mentalities. That is what a Prime Minister and a Chancellor are there to deliver, bring together and provide that leadership for. You can see at the moment that the Treasury is talking about this public value framework, wanting to use that as outcome-focused driving piece of work. It doesn’t look that dissimilar to things that have been tried in the past but that does not mean it is not the right broad approach. At the moment they have said the spending review will have some of that in, without saying exactly what that means. For that to have any effect, beyond filling out the boxes you need to put in your spending review document, to show that you are going to do something, it needs to be something that the Prime Minister and Chancellor really care about. That was true in phases in the pre-2010 era on certain bits of public services, where there was a clear, “We care about this particular objective and everybody is working to that,” and it did not work in others. You can’t wish away the politics. Personally, I think that is more important than how you set the budgets for particulars. You cannot overcome silos; you just choose where the silos are and then politics makes the best job it can of that.

Wes Streeting

Finally, do you think the Treasury should publish its spending review guidance and should Departments publish their spending review submissions? If so, at what stage, before or after the spending review takes place? Who wants to go first? We’ll go down the panel. Martin, let’s start with you.

Martin Wheatley

Generally, the IfG is very keen on much greater transparency about the Government’s spending plans. We have argued, and continue to argue, that single departmental plans should be published in full, or certainly in much fuller form than the published versions of them now. As for spending review guidance and guidance on single departmental plans, I cannot see any good reason why that should not be published. I think we might draw the line at departmental submissions, in the sense that, if Ministers knew their submission was to be published, it probably would not be as honest and open a document as it might be at the moment, not that they necessarily are hugely, as part of the gaming inside Government. If, on top of the gaming inside Government, you were adding a layer of how this will look in the public eye—“Will my stakeholders roar at me in disgust for being prepared to consider reductions in some area or other?”—then it would not happen. I think I would draw the line at the publication of spending review submissions, keen as I am on transparency more generally.

Wes Streeting

That is no fun, but very reasonable. Any other views from the panel, supportive or contradictory?

Paul Johnson

I would make a slightly more general comment on that. We have about 40 economists at the IFS. I don’t know now but there are something like 2,000 in the Government economic service, plus many more analysts. They do huge amounts of analytical work, almost none of which sees the light of day. I think it would be nice to see at least some of the analytical work underlying spending review submissions being put into the public domain, done in a very objective way. There is just so much information in Government that is genuinely interesting, not just to nerds like me but to the world. The analysis of what is going on, as Nicky will know, in the education system, doesn’t see the light of day.

Chair

We did try in DfE. Yes, absolutely.

Paul Johnson

That is true across Government. A lot of it is incredibly informative and will be either relevant or informative in the decisions made in the spending review. Away from the actual submission and the policy, I would like to see a way in which some of that analysis is published. That is probably a hopelessly optimistic wish, but I think the world would be a better place if we could do that.

Torsten Bell

That is clearly true. There is an example of that in the spring statement, which might not have had much excitement in it, as you we said at the beginning: the OBR did get the agreement from HMRC to put in the earnings feed that they are getting from the HMRC’s real-time information data showing what has happened to the distribution of earnings growth. That is really important; without that we would have been waiting a year for the information in that detailed and distributional form, so it is definitely worth doing. On your specific/naughty question, the answer is to ask for the data to be published only about the submissions, if what you want is for the submissions to be made about a week before the spending review is announced and to tell you what is in the spending review. That is what will happen with the formal submissions, if they are published.

Alison McGovern

Paul, you make a very interesting point about the data or the analysis being published; that is something that we could pursue. What description would you give of the underlying data? Is it administrative data that we would want to see, or is it other sources? Ought the Government to have a better publication policy or scheme that would give you richer data? What should we be focused on?

Paul Johnson

There are two elements here. One, which is extremely close to my heart, is simply allowing people like us—Torsten, Gemma and I—access to some data. We are in an absurd position now, where it is almost impossible to get hold of any data on Health, for example. Education data is becoming more and more difficult to get hold of. There is a lot of DWP data that is very hard, if not impossible, to get hold of. That is holding back analysis outside of Government in a very dramatic way. So one issue is simply access to data for analysts. There is a separate issue to do with the analysis that goes on within Departments, which looks at effectiveness, for example, in different schools, different further education courses, different hospital procedures, or what is happening within the criminal justice system. There is lots and lots of that, and one of the difficulties sitting in the legislature, as opposed to the Executive, is knowing what it is that you would ask for among all of that. Perhaps, if it is something that is supporting the spending review, one could say, “Well, in that case we would like to see some of the evidence underlying that.” I think there are two separate things. One is data, which that is the big issue for the people sitting at this table, and one is analysis, which may be a bigger issue for Members sitting over there.

Torsten Bell

To make that concrete—

Alison McGovern

I need to make progress—sorry, Torsten. Lord knows, I could talk about that for a long time.

Chair

We might come back to it.

Alison McGovern

Unfortunately the clock is ticking. I want to ask a few quicker questions on the impact of Brexit on the spending review in terms of Treasury staffing resources. The questions are more for Gemma and Martin. Do you think the Brexit diversion phenomenon is going to have an impact?

Martin Wheatley

The Treasury is particularly untransparent about staffing information, so we do not have anything more than anecdote to go on. I am not sure that I pick up actual physical diversion of people from spending roles; what there is, of course, the distraction of headspace, with officials having to address urgent issues about things like no-deal spending in their Department, rather than thinking the big strategic thoughts you might be hoping Treasury officials are thinking at this stage, just ahead of the spending review. We know that the Treasury has particularly big problems about staffing and turnover at the moment. Its turnover has averaged nearly 25% since 2011—one of the highest in Whitehall and double its Australian counterpart—and we know that has a big impact on institutional memory and relationships. On top of that ongoing problem of very high turnover, I am not sure I have picked up a particular issue of Brexit.

Alison McGovern

Which brings me to my next question. Your report, which I think you were referencing, says that there is a perception, widely held among other Departments, that Treasury staff are “arrogant and not consultative”. Do you think that will have an impact on the spending review process?

Martin Wheatley

We have been talking to Departments as part of our research for our next project. What I pick up is not so much arrogance as a concern that, for the reasons I have described about high turnover, Treasury officials do not have the solid base of knowledge and understanding to be effective challengers of Departments and to strike the balance between being forensically, sharply challenging, as they should be, and understanding properly the pressures on and dynamics of Departments, and moving towards problem solving at that phase in the discussion.

Alison McGovern

Would you describe the relationship between the Treasury and other Departments as functional or dysfunctional?

Martin Wheatley

First of all, what we pick up is that different Departments feel they have different kinds of relationships, and thinking back to my own time running a spending team in the Treasury, that was very true. Rightly or wrongly, the Treasury has tended to let individual teams do things their own way, and some of them are more successful than others. I have picked up on some issues: some Departments say they think the Treasury spending team has been playing a very productive role, and in others there is a feeling that, for example, the Treasury comes in and wants to talk in huge micro-detail about issues without really engaging in what the Department sees as the big picture.

Alison McGovern

The National Audit Office has said that the Treasury has “incentives to favour short-term savings over longer-term value for money”, which it says is demonstrated in the use of PFI, asset sales and that sort of thing. This is perhaps a broader question for the panel. Do you think that is true? If so, should it be resolved? Is this a scorecard problem, or is it a Treasury attitude problem?

Gemma Tetlow

To an extent, this comes back to the political leadership point that Torsten was talking about. You could see this as a problem of the accounting rules and precisely what measure of debt or deficit we are targeting, but actually it also really matters what the Chancellor and the Prime Minister care about in terms of the headline fiscal measures. If you had a Chancellor or a Prime Minister who more clearly cared about the long-term value of projects and things, I think that would mitigate the pure accounting treatment of how we score things on public sector debt or public sector net borrowing, which has tended to push previous Governments towards favouring things that get things off balance sheet or push out the student loan costs, for example, which is where we have ended up now.

Alison McGovern

So it is the interplay between politics and economics, basically. Gemma Tetlow indicated assent.

Alison McGovern

Finally on that—again, this is a slightly broader question—a consequence of the failure of universal credit is that the costs of the introduction of that system are now much larger than anyone anticipated. Are there any lessons for us in that about the problems with making such big, system-wide changes at a time of austerity?

Torsten Bell

That is a big question. The answer overall is definitely yes. Those lessons fall into a whole range of buckets. The first is just that doing big change in an area—particularly in welfare and social security—at the same time as trying to make reductions in spending is possibly not a good idea; it is very, very challenging to combine the two. It is worth saying that a lot of what you hear in the debate about the problems we are seeing in parts of the social security system right now are driven by cuts that are happening to the legacy system and to universal credit—it is the coming together of those things. It is not universal credit driving up child poverty in the next few years; it is the cuts to the system. It is both. That is the first thing. The second thing, looking back over the long journey of universal credit in the round, is that it was definitely sub-optimal that the centre of Government signed off universal credit and let the then Secretary of State get on with it while, if we are honest, never being reconciled to its being a good idea—in particular, that is true of the Treasury until quite late in the day—and then seeing it as a good way of trying to make cuts to a budget in ways that have proved to be totally unsustainable. The most recent example of that is the work allowances cuts in 2015 that were reversed, and welcomely so, in the autumn Budget. Going back to what Martin and Gemma were saying earlier, it would have been better to have a shared outcome you wanted to achieve; the big priority is to get to a simpler benefit system, and that means forgoing some of the cuts you might otherwise want to make to the system to make that possible, and it means everybody pulling in the same direction for the full eight years. That would have been a better idea.

Paul Johnson

It is worth making a broader comment about change and the fiscal situation. If we ever get a decade again like we had from 2000 to 2008, where there were genuinely big spending increases, it will be helpful for all of us to push very hard for some of the reforms that we now know need to happen. The Government have been talking about reforms to school funding, local government finance, social care and all these things, which are infinitely easier if there is some money knocking around and are proving to be virtually impossible when there is not. If we do get to a world in which there is more money knocking around, the focus on reform ought to be much sharper than it has been in the past.

Gemma Tetlow

There are three other lessons from universal credit, which are perhaps not new. In terms of trying to implement a big project, universal credit suffered from having repeated changes of the senior responsible officer, which did not help to drive it through successfully. There is evidence of over-optimism about the ability to deliver on the original timescale, and there are probably some lessons about the extent to which a policy that worked in theory perhaps did not have enough connection with the frontline as it was implemented about some of the practical, implementational challenges, which are some of what has undermined it in practice.

Chair

I have two questions arising from what Alison has just asked. Martin, on your point about the spending teams in the Treasury and how they work with the spending Departments, does it rely too much on personal contacts? Obviously, civil servants move around Whitehall, and often people will move from the spending Department perhaps into a relevant spending team. That can work well, because it means the person in Treasury knows the Department, but it could end up being that you do not have somebody in the team working with that Department who knows the Department well enough and understands the submission coming in and why it has been put together in that way. Does it still rely too much on personal relationships between Treasury and Department?

Martin Wheatley

Now you have talked about it, in the positive examples I have been picking up of effective working between Departments and the Treasury, there does seem to be a common thread of people who have worked together in the past in different configurations and who manage to work through some difficult issues. The bigger issues are, first, that too often people in the Treasury do not stick around long enough for there to be effective institutional memory and to understand why things are the way they are—not that that is a reason not to change things, but that understanding is pretty important if you are going to bring about successful change. Secondly, the Treasury has a huge lack of people who understand frontline and operational public services. There is a triangle here: the Treasury, the Department and the people who are in charge of the real services. That third area is also concerning.

Chair

The other thing I wanted to ask you about was cost shunting. When Wes was asking the questions, we talked about the fact that the Treasury have said that they want to move away from silo thinking to try to do more joint departmental working. Wes was asking whether that is likely, but from what the Treasury have set out so far, particularly in relation to the public value framework and what they are saying they want to achieve in the spending review, do you think we will see the beginning of the end of cost shunting? It is very frustrating for people outside Whitehall who lobby for sensible changes, but Departments will not make them, because somebody wants to make the change upfront, but they are not calculating the impact that not making the change will have on another Department in the future.

Martin Wheatley

I would not venture to make a prediction at this stage of what is likely to be a very fraught spending review process. A couple of positive things are, first, that the public value framework that you mentioned, if it is used in the right way, should certainly help to identify where actions in one place have a consequence somewhere else. That said, although I think there is a lot of strength in the public value framework, I have a concern that it still reads very much like how the Treasury conducts discussions Department by Department. It will be interesting to see if the Treasury actually applies it to some of the difficult issues that the Government are wrestling with, like knife crime. The Treasury have also set up a costing unit, and they tell me that that has been doing good work trying to trace cost across Government using finance professionals to do that, which is entirely right, but—going back to the transparency point—they have not published anything about it, so the rest of us cannot really judge the quality of that analysis. In line with Paul’s suggestion, maybe at some stage in the process it would be good if they could publish some of that analysis and we could see if it has been—it is certainly intended, among other things, to address the cost shunting problem. It would be good to see how far it has got with that.

Chair

That is really interesting and helps with further questions.

John Mann

Gemma, you talked about the Chancellor and Prime Minister being short term in their approach. Other than the Central Committee of the Communist Party of China, which politicians would you identify as taking a long-term approach?

Gemma Tetlow

We have seen examples in the past of politicians taking long-term approaches. Probably the best example in recent history would be the reforms that were made to the state pension and the state pension age. Announcing an increase in the state pension age is clearly a policy that does not benefit, and did not benefit, the Government when that was first announced, because it is a long-term saving on the public finances, but it was a positive in terms of putting the public finances on a more sustainable footing. You do see cases where politicians think long term, but perhaps they are the exception rather than the rule.

John Mann

Is the current tax take sustainable?

Paul Johnson

Yes. It is pretty much its highest level since the early 1950s, certainly on a sustained basis, but it is below that of most of our European neighbours. There are clearly significant risks to the current tax take. To name a couple, fuel duty at £30 billion a year or so is on a downward path. We are very worryingly dependent on a very small number of rich individuals for a very large fraction of our tax—as you know, more than a quarter of income tax is paid by 1% of people. If something goes wrong for them, that money is at risk. Clearly, there are risks around multinational companies. But there are other ways of raising tax if those things are not available; other countries have shown that there are. In my view, given what is happening demographically, it will be quite hard to sustain services without sustaining the current tax level, and possibly even a slightly bigger one, over the next 10 or 20 years. The issue again is one about where it is politically saleable—

John Mann

That is a separate question. I am asking economically.

Paul Johnson

If the question is economically, then yes absolutely.

John Mann

Does anyone disagree with that?

Torsten Bell

No, but I think we should also be careful. There is a lot around at the moment saying, “We’re at a record high with the tax take; it can’t possibly go any higher.” Paul has given the first good answer to that, which is, first, it has gone above levels people said were unsustainable in the past, and secondly, we are lower than the G7 average, the OECD average, and the average of big EU countries, so clearly it can go higher. The second thing to think about, which needs a lot more work, is that we are measuring this as tax to GDP, yet famously we are not doing a lot of investing right now. You do not get tax from investment; you get tax from consumption. If you have lower investment, it looks as though you have a higher tax-to-GDP ratio, even though tax rates have not changed at all. There are a number of other things, such as more income being from pensioners drawing down their private pensions. That may also push up our tax-to-GDP ratio—we are paying tax on stuff that we earned a long time ago. Those two things together mean that we may want to start looking at other metrics, such as tax as a percentage of expenditure—that is broadly flat, by the way—and tax as a percentage of income which, if anything, is falling. Even after we allocated all indirect taxes, intermediate taxes and direct taxes, the typical taxpayer has not seen a big increase in their tax burden. It is definitely not right to say that you cannot go higher, for a whole range of reasons.

John Mann

Economically speaking, to increase the tax take in absolute terms, which would be the best taxes to increase?

Paul Johnson

You have a range of options. First, you could look at what other countries do, and the two big things they do for raising more tax than us is, first, they tend to have broader VAT bases, and secondly they tend to have higher social security contributions. That is one place you could look. Another place you could look is at where we appear to under-tax things. For example, high-value properties are taxed a lot less through council tax than low-value properties. We need to find a way to reform fuel duty, perhaps with some kind of road charge. That is clearly something to do economically, and it would be bad not to replace that duty in some form or another. We under-tax in some odd ways, such as pensions in payment, for example. We have extraordinarily generous inheritance tax treatment for defined contribution pensions, which we could sort out. That would not get us much money in the short-term, but it would be helpful in the long run and get around absurd problems in the current system. If you are looking just at the economics, would it be economically damaging to raise the basic rate of tax by a couple of pence? Probably not very. There are quite a lot of economically sustainable or good ways of increasing tax and making the tax system more efficient at the same time.

John Mann

Let me ask you, Gemma, unless you fundamentally disagree with Paul, other than the point about inheritance tax, there are no taxes on the rich. Is it illusory to suggest that, in terms of economic efficiency, the way to get a big increase in tax take is to tax the rich more?

Gemma Tetlow

Going back to the point that Paul raised earlier, our tax take is already quite dependent on a relatively narrow group of people, and trying to raise more from the same group of people makes our tax take increasingly susceptible to the behaviour of those people. From an economic point of view, we must think about how much would be raised by increasing taxes on that group of people, but you also need to worry about whether they will change their behaviour in response to that increase in tax. Broadly speaking, economists tend to argue for broad-based taxes that impose a small additional tax burden on lots of people, because the distortive economic impact of doing that tends to be smaller. There are areas that we do not tax heavily at the moment. For example, there are some exemptions to inheritance tax, which certain types of people benefit from if they can arrange their affairs in that way. That tends to benefit better-off people because they have enough money to plan their affairs in that way. The obvious thing that we do not tax at all in this country is capital gains on people’s owner-occupied housing. That is a very generous tax treatment of those capital gains, but obviously a huge number of political questions would relate to any attempts to change that.

John Mann

Paul, you stated that the forgotten towns fund of £1.6 billion was not new money. You put a statement out saying that. The Chancellor responded within two hours saying that other than £100 million, which came from existing DCLG funds, the other £1.5 billion was new money. Is he misleading Parliament? Were you correct?

Paul Johnson

I do not know the answer. I do not recollect the details at all.

Torsten Bell

The debate is whether funding that has been announced while there is a spending envelope set for future years, but the spending review has not actually been done, is genuinely additional, or is just an issue that will be resolved in the spending review.

John Mann

Paul, you put the statement out. You were quoted in the press on it.

Paul Johnson

I do not recall that, I’m sorry.

Chair

Was it Paul or the IFS?

John Mann

It was Paul, on behalf of the IFS.

Chair

Question the press office then.

Paul Johnson

I will look into that—sorry.

John Mann

That was reported in the press in your name and the IFS.

Paul Johnson

It is quite possible.

Torsten Bell

Is it possible to come back to your question on taxing the rich so that at least I can disagree a little bit? I am worried we will agree about everything. Gemma is totally right to say—we would all say—that the income tax system has become more reliant over time on the very rich. The percentage of income tax paid by the rich has gone up for two reasons: first, the rich got more money over the past 30 years in incomes, and secondly, relative rates for them and the personal allowance rises taking a load of other people out of income tax means they are paying more income tax. That is a volatility risk for your tax base, which you will want to weigh against fairness objectives. Overall taxation is much more evenly spread across the income distribution; it is almost exactly flat once we have taken all taxes into account—it is a lot flatter than income tax, anyway. If you were looking at taxes more broadly and asking where the rich can contribute more, the first place to go would probably be wealth. Wealth has gone from three times to seven times as a share of GDP since the 1980s, with no increase in the wealth tax burden over that time period. From inheritance tax to entrepreneur’s relief on capital gains, there is a whole swathe of things that you could do to improve our tax system, which would be good, or at least not bad, for economic growth and would bring in significant revenue.

John Mann

Thank you for that. Paul, it was the Centre For Towns, which specifically put out a quote directly attributed to you in relation to that.

Chair

Perhaps you could to look into it and then let us know.

Paul Johnson

I will look into it. They may or may not have been misquoting me, but I don’t remember saying that.

John Mann

Please do, before I raise it with the Chancellor in two weeks’ time. Are any other councils going to go bankrupt in the way Northamptonshire has?

Paul Johnson

I do not know specifically whether that will happen.

John Mann

Do you fear that, or anticipate that it might happen? I am not asking if you have inside information.

Paul Johnson

I do not know.

Chair

Is that something the IfG would look at—the financial health of local authorities?

Gemma Tetlow

It is not something we have looked at. Beyond the question of whether they would actually go bankrupt, there are clearly a lot of councils that have had to make very difficult decisions about how to stop themselves going bankrupt within very tight spending envelopes, while trying to continue meeting their statutory duties on social care. So a lot of them have squeezed very tightly those non-statutory duties. A lot of them are in that position, even if they are not yet in bankruptcy.

Paul Johnson

One thing we can say for sure about the medium term is that the current system is not sustainable, given that the policy is that councils as a whole should be funded only by business rates and council tax, and they are not growing anywhere near fast enough to cope with the increase in social care demand going forward.

John Mann

Are the changes to business rates going to have a significant impact in terms of the ongoing viability of local authorities?

Paul Johnson

You are referring to the fact that councils will keep a portion of their additional business rates revenue going forward. That will create a change in the distribution of income between local authorities, and those that are getting less, either as a result of bad luck or bad management, will struggle more. Additional business rates revenue is highly unlikely to be correlated at all with increased demand for things like social care, so it certainly increases risk in the system.

John Mann

We have, for example, the projected closure or actual closure coming up of six power stations, which has a huge business rates implication for the local authorities concerned. There is no formula in place for mitigating that yet. Have any of you looked at some of the anomalies that could create crisis—obviously, the Northamptonshire one was for different reasons, but is of comparable criticality—because of the change to the business rates system, or are you thinking of doing so?

Paul Johnson

We have done some work in that area. On the very specific, individual examples that you are quoting, we do not at the moment, but again, we can let you know whether there is anything on that.

Catherine McKinnell

I want to talk a bit about regional economies, the significant disparities that exist in the UK both within and between regions, and the fact that, contrary to some expectations, London’s GVA has continued to increase rapidly since 2008, while the three northern regions of England have experienced the biggest declines. Could more have been done in the spending review to address some of these regional imbalances? What would you have wanted to see if that had been the Government’s priority?

Torsten Bell

That is a massive question. Let me focus first on what has happened since the crisis and then look at the longer term trend. I think the idea that it has been boom time for London since the crisis and everyone else has done badly is the wrong take on the data. London’s GVA has grown slightly faster than the country as a whole—well, faster than the northern regions—since the crisis, but GVA per capita in London has actually grown slower than the UK average since the crisis. The stand-out phenomenon in London in the last decade is very large population growth and very large employment growth. On productivity, I do not think it is right to say that London has outperformed the country as a whole post crisis. It was just starting from a much higher level. I think it has actually done very badly, and that stacks up with what you see sectorally if you look at the productivity data. What has actually led to our slowdown since the crisis—not our lower level than other countries, but our slowdown—is our advanced sectors. If I an honest, it is the slightly complacent financial services and professional service firms that think everything is going great. Those firms have not invested and not trained and have not seen productivity growth since the crisis. That is where the problem is. That is the first thing to say. The second thing to say is this. Why does London look like it is outperforming? It is because of two things: it has had very strong population growth and it has experienced the same thing as lots of other large urban centres, which I will explain. Starting from a lower employment level—London traditionally has had a below-average employment level—it has just caught up to the average. Urban areas in general—big ones—have had the biggest rise in employment growth, so we have had a catch-up. The big picture over 10 years is a catch-up of low-employment urban areas towards the national average. The fastest growth is in South Yorkshire and Merseyside—that is where there has been the biggest employment as a percentage point increases, because they were very low to start with. London is part of that picture, just with large population growth chucked on top. It is mainly migration, but not just migration, doing that. Broadly, what is going on in the country is a narrowing of employment gaps. All the “Get on your bike to get a job” stuff from the ’80s makes less sense today because there are far fewer areas with very low employment rates. We have seen a narrowing of the distribution of employment, with low-employment urban areas doing the best. The areas where you do see worries post crisis are smaller northern towns, which is where the employment boom has not reached.

Catherine McKinnell

Yes, and that could take us on to Brexit. Anyway, I totally recognise the economic picture, but you need to look at the social indicators. The flipside of what would appear to be growing employment is the gap, even if you just look at life expectancy—the gap in healthy life expectancy between some of the most well-off and poorest parts of England is 18 years for women and 19 years for men. Clearly, this is an issue with productivity growth, I would say, but also a growing gap between those areas and the ability of the types of jobs that are being created to keep up with the cost of living. I would be interested to hear whether you agree and what your analysis is.

Torsten Bell

The big picture analysis: the standout feature of this decade that we will all be living with for years to come is the stagnation of living standards growth on a shocking scale that none of us thought was remotely possible. What is driving that? Principally, low earnings growth over the whole period, except for a slight period in 2015 when we got slightly faster growth, where we had strong employment growth and very low inflation driving okay living standards growth. Except for that, the whole decade is a disaster that we just did not think was possible, and earnings and productivity are the main features of that. Right now, something slightly different is going on, which fits more specifically with what you are saying. Over the last few years, quite large benefit cuts have been rolled out. Overall, there have been income growth disasters for everybody, particularly bad for the rich in the crisis, but then broadly expanded for everybody over the whole period, with this mini boom in 2014-15. Now, though, what is happening is that it is bad for everybody again, because we have had an inflation spike, but at the bottom we are seeing slower income growth, and that is likely to be the case for the next few years as well, because of the roll-out of the benefit cuts. It is not about universal credit but it is about a benefit freeze saving just under £5 billion over the course. That is causing income falls for the bottom 20% of the population over the next few years. That is what is driving up child poverty over the whole period. It can be erratic year to year but the upward trend is likely to be pretty well established. Even if you had had stronger earnings growth, that would probably put up the relative child poverty figures anyway. That is what you are seeing going on. Overall, why do things feel so tough over the 10 years? That is not because the poor, until recently, have done much worse than everybody else but because everybody has done badly. That is the defining feature. That squeeze is why things feel so tough. Then there are specific issues around destitution, housing benefit and homelessness, which are very visible. They affect relatively small numbers of people but are incredibly deep for those who feel them, where clearly you have big distributional effects early on and then, right now, you have the bottom being left behind. It is quite staggering the scale of the income disposable after housing cost losses you will see for the bottom 20% of the population. We are talking huge falls over the next few years. That is what is driving up child poverty—nothing else—and that is policy not economics.

Catherine McKinnell

Okay, but bringing it back to the spending review, what could and should be done about that? Is there something within the driving of productivity that could be the solution?

Torsten Bell

On the spending review, one really important thing is that for the first time, at least in my memory, our AME spending—our non-departmental spending—is now more than half of our overall spending. Traditionally, or at least pre-crisis, we spent more on public service spending Departments than we did on social security, debt interest and other things. Although a spending review would talk about AME spending, was about sharing out a DEL envelope. We are now not in that situation because we have tightly controlled departmental spending over the past decade, while debt interest is slightly higher and pensions are rising for other reasons. It is definitely worth thinking about that when you do your spending review. You will, as George Osborne did on previous occasions but in a negative way, think again. This autumn is another chance to think again about whether you really want to be delivering this scale of income losses to the poorest families. Although the policies will all have taken effect by then, lots of the families are not affected yet. About half of the welfare cuts from 2015 are still actually to affect people. That will happen, even though the last policy comes in next Saturday. There is lots of this still to come. Reconsidering what is going on in AME not just in DEL, if what you care about is the income distribution, is very sensible. More broadly, on how to get productivity growth to lots of areas of the country, there are lots of people who have done more work on that than we have. A few things do come out of our research. One is that getting more advanced jobs to other areas of the country does help, but it does not solve everything. It does not solve pay. It will create more lower paid jobs around it, as a spill-over effect, but it probably will not raise pay of lower paid people in the area, as they stand today. That is worth thinking about. If you care about your industrial strategy, you probably care about productivity growth more broadly in the economy, not just at the advanced end. Secondly, it is really important to think about what you care about on inclusive growth. Housing costs are being completely underestimated in that debate. The pushing up of housing costs when you drive other kinds of growth, if you do not have policy that responds to housing availability and where it is, can outweigh a lot of the benefits of getting that GVA growth in the first place. Be really careful about the towns versus cities debate that is growing. There is an important truth in some of it: lots of our northern towns in particular have done very badly over the 30-year period, but they have not done badly because Manchester and Leeds have done well. In fact, the bigger reason they have done badly is probably that Manchester and Leeds have done less well than they should have. Thinking in terms of the spending review, we should be clear about how we join up those areas. For example, in Greater Manchester, the GVA is growing in central Manchester but income growth is not. Central Manchester is poor compared with Greater Manchester as a whole. It is the rich suburbs—some of which were poor before—where people want to commute into the GVA growth, where we are seeing the income growth. It is important to think hard about what GVA and income growth are doing and where they are different—they are spatially different—in order to get the growth we want outside just the city centres.

Catherine McKinnell

As a policy focus, presumably part of the answer is initiatives such as the northern powerhouse, which is probably not getting the focus that it was or should be getting. I have always had grave concerns about it being more of a slogan than a reality. It would be interesting to hear your take—and anyone else on the panel who wants to contribute—on whether those initiatives will genuinely resolve this issue, or whether it is a fundamental underlying issue that cannot be resolved. Are the Government are giving enough focus to that, and should there be more, given all the impacts outlined will only be exacerbated by Brexit, depending on how that pans out?

Martin Wheatley

As part of my current project, I have been talking to political and managerial leaders in Greater Manchester and other northern metro areas. As you hinted, I do not think there are any illusions about the northern powerhouse being wonderful in every respect, but one of the things that people give it credit for is central Government and local government in those metro areas having a grown-up conversation about how public investment across a range of different budgets in those places could lead to economic growth, and about how local public services could address some of the social challenges. People say they have seen some ebbing of interest in central Government in the last couple of years, doubtless for obvious reasons given what else has been going on. What could be done in the spending review, as part of the zero-based review of capital that the Treasury is talking about, is not just trying to look at capital budgets at national level but trying to think about the investment case for particular metro areas, looking at all the streams of capital spending that central Government put into places, and listening to what local areas have to say about a combined investment case that could increase productivity and the local tax take in those places.

Catherine McKinnell

In terms of transport infrastructure, investment in projects such as the northern powerhouse rail have stalled. As you say, they are distracted for obvious reasons, but presumably you would support investment of that nature in order to resolve some of the imbalances. Also, the Government have analysed the outcomes of Brexit and those impacts clearly are greater on some regions than on others, the north-east being a prime example. Obviously we do not know what is happening, but whichever Brexit outcome Parliament arrives at, are we potentially going to see a similar impact to the one that followed the 2008 financial crisis and only an increase in these regional disparities? What do the Government need to do now, in this spending review, to head that off at the pass?

Paul Johnson

There is genuine uncertainty about what the regional distribution of a Brexit outcome would be, partly because it is incredibly hard to know what the impact on a lot of the services industries would be, particularly financial services. Estimates vary wildly. It could be that London is particularly badly hit because as we move outside the single market, access to European trade is damaged for financial and other professional services. Actually estimating that or knowing it ex ante is very hard; it may be more or less. We know that if we move outside a customs union in particular, and we get significant barriers to trade for manufactured goods, some groups of manufacturing areas will be particularly badly hit. Those include textiles, transport—particularly car manufacturing—some chemicals and pharmaceuticals. Within that, we know that there are particular kinds of employees who are most likely to be affected, and I am afraid it is the same group who have been hit in the past: semi-skilled and skilled manual workers, often male, in the midlands, the north and Northern Ireland are the most likely to be affected. It is easier to estimate this in the manufacturing part of the economy, which represents 20% of the economy. We can see it because there is lots of intra and inter-firm trade in those industries, and those are the sorts of people employed there. If we end up with a significant increase in non-tariff barriers as a result of coming out of a customs union, then Government need to be prepared to support those areas and those people in some way. They need to be ready for industries moving out or declining, as we saw in a big way in the 1980s.

Catherine McKinnell

Which takes us back to the evidence that you gave at the beginning. Thank you.

Chair

Before I bring Charlie in, I have two questions for Torsten. You have probably touched on some of this already. First, you mentioned child poverty obviously having increased. Has the profile of those living in poverty changed in recent years?

Torsten Bell

Over the longer time period you will know the well-established move away from out-of-work poverty households, with nobody in work and the kids in poverty. That partly relates to the employment boom since 2010, but it is actually a longer-term trend that goes back through the 2000s, when we saw reductions in worklessness. That means that now about 70% of the children in poverty are in working households. Of the 30% who are not, the bulk of them are in single-parent households where we, as a society, have so far not imposed the same work conditions on those with young children as we have on the wider population. That is the longer term trend, which is a big fundamental change. We have seen a reduction in the role of poverty for pensioners relative to the working age population. The role of disability in poverty, although not as visible as it might be in the stats, is also understated and a big growth area.

Chair

That’s interesting. The other thing was, I think, that your Resolution Foundation analysis indicates that households are £1,500 worse off than was forecast before the referendum. I think you mentioned before that everybody is worse off, relatively speaking. Have you done an analysis of that £1,500? Is it spread across UK households or is it, again, concentrated towards the bottom end?

Torsten Bell

That is an aggregate based around a national average, so I wouldn’t want to speculate about it. There are three interesting things happening regarding distribution at the moment. One is the benefit restrictions I have talked about, which are affecting the bottom third or so of the population. Then, on the earnings distribution, we are seeing the continuation of the trend of fast growth at the bottom—the national minimal wage going up is having a very real effect on average hourly earnings at the bottom—and, more recently, at the very top. That latter growth is not across the whole period but only in the last year or so. On the weekly earnings distribution, though, we are not seeing that fast hourly pay growth at the bottom feeding through into faster growth in weekly earnings. In fact, weekly earnings last year fell for the bottom of the distribution. Let’s wait and see what other years show us in data, but we have had two years of a kind, although in last year’s particularly, actual weekly earnings fell. That may be being driven by hours reductions for low-paid workers, which we can see across a 30-year period when it comes to lower-paid men, who are the ones doing fewer hours than they want and are more likely than they were to be in part-time work. That is driving part of what is going on, but I don’t think we know the full answer to what is going on there. So, you have a U shape on your earnings curve, particularly high at the bottom overall—bad at the bottom for weekly but not for hourly—and then on the income distribution you have benefit cuts driving the distributional shape, but it is basically rubbish for everybody. That is being driven by the inflation spike. Why have incomes fallen more than GDP in Britain? The GDP, depending on what number you want, is a minimum 1.2% or more likely around 2% lower than it was expected to be before the Brexit referendum. We do not do our own estimates of that, given the uncertainties, but that as a GDP effect is somewhere in the region of £1,000 lower per household, and possibly slightly more. The effect on household incomes is significantly higher than that GDP figure.

Chair

Because of the inflation?

Torsten Bell

Because of the inflation spike, but because it is a consumption inflation spike, CPI, not a GDP deflator—that is, the cost of what we produce as a nation, which is all about the exchange rate—and that has given us a higher household income hit, which is what drives the figure of £1,500 that we produced back in February.

Chair

Thank you; that is very helpful.

Charlie Elphicke

Let me ask about no deal. From the point of view of the Government, that is not their current policy, but it might be that the European Union have enough, so we do not know. It is still a possibility that there could be no deal.

John Mann

I think that has declined quite a bit in the last 24 hours.

Charlie Elphicke

Indeed. Dr Tetlow, on the same day that they published the spring statement, the Government also published a little-noticed tax information and impact note on the impact of its proposed no-deal tariff schedule. Have you had a look at that, and if so, what do you make of it?

Gemma Tetlow

The no-deal tariff schedule that came out obviously set out a plan that in the event of no deal the Government would not just adopt the EU’s most favoured nation tariff schedule, but instead reduce most of those tariffs to zero on imports from everywhere, as required by the WTO, while keeping in place some tariffs in particularly sensitive areas—beef products, ceramics, textiles and vehicles, for example. I think the Treasury officials described that as being a pragmatic trade-off between trying to benefit consumers by abolishing tariffs and therefore reducing consumer prices, and trying to protect producers in some sectors of the UK. It was noticeable that we did not have much of this public debate, given the importance of the decisions made over tariffs, and they highlight the difficult trade-offs that there are in setting trade policy between wanting to protect existing domestic producers and the cost that that imposes on consumers and any other businesses importing intermediate inputs to their production processes.

Charlie Elphicke

So that trade-off, and the impact of that trade-off, will be quite important—in fact, you would think it would be the heartland of a political, as well as an economic, choice. Yet the Treasury then said in that note that in the event of a no-deal scenario, full estimates of the Exchequer impact would be produced and set out at a later date, subject to scrutiny by the Office for Budget Responsibility. Do you think that is normal behaviour for the Treasury?

Gemma Tetlow

There are two bits of the impact that you might be interested in. One is the economic impact, and therefore the impact on particular sectors and different types of consumers; the other is the fiscal impact, which is what you are referring to, which was not quantified—that is, how much extra tariff revenue, or less tariff revenue, will the Treasury receive as a result of adopting that policy as opposed to any other choice? I have no reason to disprove the Treasury line that that is an analysis that the OBR will have to do, but obviously the OBR is not at liberty to model policy that is not Government policy at the moment, so it was not modelled in its spring statement forecasts. It is an important political choice that has been made; there was relatively little debate on any of it and, as you say, no official figures on what it would do to the public finances.

Charlie Elphicke

That is an issue, isn’t it? The OBR has to parrot Treasury figures; unlike virtually every other country in the OECD, there is no independent verification of Treasury figures. But, happily, there has been some analysis by the Bank of England, which said, interestingly, that out of all its various scenarios, having low tariffs would seem to result in much higher growth. What is your take on the likely trend growth rate with the position the Treasury has taken?

Gemma Tetlow

We have not done our own analysis of this, and I have not seen a comprehensive attempt to model the no-deal set of tariffs that were put out. Broadly speaking, economic modelling tends to suggest that trade liberalisation—reducing tariff and non-tariff barriers—is good for economic growth overall, although obviously it does have implications for particular types of producers in the UK, so it does not surprise me that the Bank of England suggested that trade liberalisation would be good for economic growth overall.

Charlie Elphicke

So, cut tariffs, grow faster and have more money for households and more economic growth.

Gemma Tetlow

Well—

Paul Johnson

May I add something?

Charlie Elphicke

Let Dr Tetlow finish, and then you can come in.

Gemma Tetlow

It is important to say that these days, given that most tariffs are pretty low, trade liberalisation is more about getting rid of non-tariff barriers to trade—aligning regulations and that sort of thing—than about the tariff side.

Paul Johnson

That last point is really rather important. Back of the envelope, on the suggestions the Treasury made there might be a small number of billions cut in duties. That in itself is not going to have a big effect on the economy. Outside food and agriculture, by far the biggest trade barriers are non-tariff barriers rather than tariff barriers. Those are more uncertain, but they are undoubtedly bigger for most sectors—particularly sectors such as manufacturing, where there is lots of movement between or within companies across borders, where hold-ups and red tape of one kind or another matter much more than the actual tariffs. The impact on growth of changing tariffs and the impact on the public finances of changing tariffs are relatively small compared with those non-tariff barriers. That is the key takeaway from this at a high level.

Charlie Elphicke

Nevertheless, is it not remarkable that they have come up with a tariff schedule that they themselves do not seem to have modelled, the OBR has not modelled and you have not modelled? Is it not an extraordinary abdication of responsibility to just put your finger in the air and come up with a tariff schedule without any serious modelling? How could this happen?

Paul Johnson

I do not know how much modelling they have done, but I repeat my point: the fiscal impact would be small billions, and the economic impact would be relatively small.

Charlie Elphicke

That is not entirely what the Bank of England says, though, is it?

Torsten Bell

What I think the Bank of England is saying—correct me if this is not your interpretation of it—is about the effect of the tariffs taken in isolation. What is happening in a no-deal scenario where the Treasury actually does these tariffs is clearly a net increase in barriers to trade, for which you are then making a pragmatic—as they call it—decision to reduce one aspect of them that is within your control. The trade-off you are making there is about whether you care more about the short-term effect—counteracting the exchange rate effect of no deal on prices and supporting supply chains that are suffering with other non-tariff barriers by reducing tariffs. You are choosing to prioritise those two things over your ability to strike any future trade deals, because you have already provided most favoured nation status of zero tariffs on most things, so you will be negotiating on the tariff front just on cars and agriculture, basically—there will be a few other things. The big picture is a marginal change within a bigger change in the other direction, which is a perfectly legitimate policy choice, and then taking that decision and trading it off against your ability to strike future trade deals on tariffs—not on other things, which you can carry on discussing. That is the interesting thing about what the Treasury said: they care more about the short term than they care about the trade deals in the long term. The reason they are saying that is the point Paul makes, which is that other stuff is more important, probably, in the longer term.

Charlie Elphicke

You say other stuff is more important in the longer term. Like what?

Torsten Bell

Like your level of market access for non-tariff reasons, your rules of origin checks—those kinds of things.

Charlie Elphicke

Isn’t that the issue? If you went for quite strong tariff liberalisation, free traders would be very pleased, but if I was President Trump, sat in the White House with my trade adviser, why would I bother doing a deal with Britain when I had access to the British market?

Torsten Bell

The answer to that is, first, that you care about other things than tariffs. Why do customs unions exist? Why are they better than a free trade agreement in general? There are other issues, but just to simplify, because of rules of origin. That is the big change that you get. I do get the point you’re getting at, which is “Are we accepting a trade-off by choosing to basically zero large chunks of our tariff schedule in a no-deal scenario?” Yes, but it is a pragmatic weighing-up: “I care less about getting down American tariffs in the future via a negotiation than I care about immediate supply chain and living standards shocks.” That is just the choice you make. I do not have a personal view on the balance of that risk, but it does not seem an unreasonable one to me.

Charlie Elphicke

What you seem to be saying is, “Tariffs are one thing, but actually, that is not really the problem. The problem is friction, and the problem is effectively non-tariff restrictions on market access, say, to the European Union.” So we are single market ready; they might nevertheless start imposing regulations upon us and making it harder for us to sell into their markets. Is that kind of the message that you are imparting, Dr Tetlow?

Gemma Tetlow

As we have already said, non-tariff barriers do matter, and obviously while we might currently comply with EU regulations on all sorts of things, there is a question of how you prove that you comply with those in a way that is satisfactory to the EU. There obviously has to be some kind of validation process that goes on as well, which imposes some additional checks. We do not know exactly how large those would be, compared with where we are at the moment.

Charlie Elphicke

Just looking at the wider economic impact, broadly, 7% of our GDP is exported to the European Union. We import 15% of our GDP from the European Union; they effectively have a massive balance of trade surplus. If there were to be friction, leaving aside tariffs, then first, would that necessarily cause us to see a reduction in exports, or will markets find a way in any event? Secondly, if there were friction, that would imply there would be increased demand in the UK economy that would be unfulfilled by European imports, which are now harder to import. Will that then end up with a kind of Trump-style demand increase within the UK economy? Is it necessarily straightforward?

Torsten Bell

No, it is not straightforward. The first thing to say about your 7% and 15% figures—I cannot remember the exact figures—is that both of those are relative to the size of the UK economy, and clearly, the 15% is actually relative to the size of the EU economy. The scale of the trade from us into the EU is clearly a bigger deal for us than it is for the EU coming back into here, just by the law of averages: it is a bigger market, we are a smaller market. That is the first thing to say on that. You probably do not want to compare them in that way. The second thing to say is, what does a move from equilibrium A to equilibrium B mean when what has changed between the two is your trading system? That means a lot of churn as you adjust to the optimal structure of your economy, given that trading relationship. That will lead to the kinds of things you are talking about, which is that some things we previously imported can be produced in the UK as their price goes up and consumers have to pay more for them, but then things that were previously produced in the UK and sold into the EU can be satisfied within the EU markets. Actually, in some ways, the increase in change that comes—everyone is always talking at the moment about how economic change is faster than it has ever been, the robots are destroying all the jobs, and we have never seen change like this, which in general is nonsense. By most measures of economic change, except on retail in the past few years, I do not see evidence for that. People are moving less, job change is not up, tenures are increasing, young people do not drink or do anything—[Laughter.] In general, but—

Charlie Elphicke

I don’t think that’s true.

Torsten Bell

Young people are drinking less, taking less drugs and sleeping with less people—I mean, they’ve got problems. That was not where I was going.

Charlie Elphicke

They do smoke less.

Torsten Bell

They also smoke less, but let’s get off the young people. The point I was trying to make is that the economic change that comes with a big change in your relationship, irrespective of whether A and B are better or worse than each other in the very long term, is what we really should be talking about. Those are the big changes, and they have dislocating effects. The honest truth is, in lots of ways, we cannot tell you exactly what will change; exactly where the factory will close, which ones are tenable and which ones aren’t. That is the change you will live through when you choose to move from A to B.

Chair

Finally, it might be that this is not your area of expertise, but obviously the Chancellor introduced a tax on plastic packaging. Perhaps this question is particularly for the IfG or the IFS: have you done any particular work looking at the Government’s current position on environmental taxation and subsidies, and any work on what you would like to see be reviewed or taken forward in the next spending review period? Has the IfG done any work on that?

Gemma Tetlow

We haven’t done anything like that.

Chair

Has the IFS at all?

Paul Johnson

Not on plastic packaging, certainly. No.

Chair

I won’t ask you that particular question, then. Torsten, you could be doing something at the Resolution Foundation, but I did not think that was your area of expertise.

Torsten Bell

We are plastic-free at the moment.

Chair

Excellent. Can I thank you all very much indeed for your time this morning? It has been a fascinating session; we could have spent a lot longer, but you will be pleased to hear that we will not, because we all have to go and listen to the Prime Minister and Jeremy Corbyn and see what they are going to say now. Thank you very much.