Tuesday 17 January 2017
Charter for Budget Responsibility: Autumn 2016 Update
Today I have laid before Parliament an updated charter for budget responsibility. The updated charter sets out a new fiscal framework, changes to the operation of the welfare cap, and minor amendments to text on the operation of debt management.
The updated charter laid today was published in draft on 23 November 2016. The charter was first published in draft as it includes modified guidance to the Office for Budget Responsibility. Under section 6(4) of the Budget Responsibility and National Audit Act 2011, if the Treasury proposes to modify the guidance to the Office for Budget Responsibility included in the charter, a draft of the modified guidance must be published at least 28 days before the modified charter is laid before Parliament.
Since publishing the charter in draft one operational amendment has been made, requiring the Debt Management Office to produce a debt management report annually rather than as part of the budget report. This change has been made to facilitate the move to a single fiscal event. The change does not modify guidance to the Office for Budget Responsibility.
A debate and vote in the House of Commons on the updated charter has been scheduled for Tuesday 24 January 2017.
Office for Budget Responsibility: Fiscal Sustainability Report 2017
The Office for Budget Responsibility (OBR) has today published its sixth fiscal sustainability report (FSR), fulfilling its legal obligation to publish an analysis of the sustainability of the long-term public finances and an assessment of the public sector balance sheet at least once every two years. The report was laid before Parliament earlier today and copies are available in the Vote Office and Printed Paper Office.
The FSR provides us with insight into how long-term economic and demographic trends, including our ageing population, are likely to impact the public finances over the next half century, without mitigating action. These long run projections are based on OBR assumptions of unchanged policy beyond the medium-term horizon. They are therefore not the OBR’s predictions of what will happen—but an illustrative projection of what may happen, if the Government did not take action.
In producing these projections the OBR must make stylised assumptions, and as they note, many of these assumptions are subject to a high degree of uncertainty. The results are highly sensitive to these assumptions, and this is particularly the case over the 50 year horizon in the FSR. For example, the OBR project that debt to GDP by 2066-67 could be between 40% of GDP higher or 101% of GDP lower than the central projection, depending on which assumptions are used to underpin projected growth in healthcare spending.
Their findings must be interpreted in this context. However, the FSR’s underlying conclusion is clear: fiscal sustainability will come under increasing pressure from both demographic change and the need to improve efficiency and productivity over the next 50 years. It is important that action continues to be taken to address demographic pressures and improve efficiency, particularly in the health sector.
While the FSR’s fundamental message is unchanged from previous reports, changes to the assumptions underpinning this year’s projections drive higher projected spending than in previous reports. Higher projected spending, alongside higher initial borrowing and debt, feeds through, in turn, to higher projected borrowing and debt by the end of the projections.
In terms of specifics, the FSR projects that spending on the state pension will rise from 5.0% of GDP in 2021-22 to 7.1% of GDP by 2066-67, putting significant pressure on taxpayers. To ensure that the state pension remains sustainable and fair across generations, the Government are carrying out their first review of state pension age. The Government will consider all the evidence—including an independent report by John Cridland—before formally responding by publishing their review by 7 May 2017.
The FSR also projects that health spending will rise from 6.9% of GDP in 2021-22 to 12.6% of GDP in 2066-67, due to the inclusion of non-demographic cost pressures in the OBR’s analysis for the first time. As the OBR note, there is significant uncertainty around this long-term projection, and it does not take into account the impact of any Government action to address projected cost pressures in future Parliaments. We are taking steps over this Parliament to improve the efficiency of the NHS. This includes funding for the NHS’s five year forward view plan, which sets out its vision for a sustainable long-term future for the NHS, and its proposals for reforms to help it meet future challenges. Decisions on funding in the longer term will be for future Governments to take.
Overall, the FSR demonstrates that the situation would be far graver without the significant progress made by this Government since 2010. The deficit the Government inherited in 2010 stood at 10% of GDP. We have now brought down the deficit by almost two-thirds of GDP and, by 2021-22, the OBR forecast that borrowing will have fallen to its lowest level in two decades. In 2018-19, the OBR forecast debt to fall as a share of GDP for the first time since 2000-01. The magnitude of the long-term fiscal sustainability challenge faced by the UK is similar to many other advanced economies, according to international institutions. Debt is projected to reach 141% of GDP in the US by 2046, and could reach over 180% of GDP in Germany by 2060. This compares to about 125% of GDP in the UK by 2046-47 and rising to about 200% of GDP by 2060-61 as projected in this year’s FSR.
Nonetheless, despite significant progress made to repair the public finances since 2010, today’s OBR projections suggest that, without further policy change, debt will reach over 234% of GDP by 2066-67 and continue on its upwards trajectory thereafter, driven by increased age-related spending.
Clearly, this would not be a responsible course of action. This provides the motivation for the fiscal framework that the Government set out at autumn statement 2016. We must continue to reduce the deficit and get debt falling over the medium term. And we must bring the public finances to balance at the earliest possible date in the next Parliament. The debate and vote on the new fiscal framework will take place next week, enshrining these commitments to fiscal responsibility into law.
As we look towards the next Parliament, ensuring that the public finances remain sustainable will continue to be one of this Government’s key priorities. In consideration of this fact, at autumn statement 2016, the Chancellor announced his intention to review public spending priorities and other commitments for the next Parliament in light of the evolving fiscal position at the next spending review. Fiscal discipline today will help us tackle any future economic shocks and reduce the burden of debt on future generations. Increasing life-expectancies and other economic trends will continue to pose challenges for the public finances. In response, we will continue to control public spending and grow the potential of the UK economy, including by targeting increased investment in infrastructure to increase the UK’s long run productivity challenge.
The FSR is yet another important example of the credibility and transparency that the independent OBR brings to the public finances, as recognised recently by the IMF’s fiscal transparency evaluation.
Communities and Local Government
Homelessness Reduction Bill
I am today updating the House on a commitment I made at Second Reading of the Homelessness Reduction Bill—the private Members’ Bill introduced by my hon. Friend the Member for Harrow East (Bob Blackman)—to fund the costs of the Bill in line with the new burdens doctrine.
I can confirm that the Government will provide £48 million to local government to meet the new burdens costs associated with the Bill over the course of the spending review. It is estimated that offsetting savings to local authorities will mean there are no costs thereafter. This reflects the cost of the Bill in its current form. I will continue to monitor the Bill as it proceeds through the House and will update the new burdens assessment as appropriate once the Bill is in its final form.
Estimated new burdens costs of the Homelessness Reduction Bill Year 2017-18 2018-19 2019-20 Net cost £35.4 million* £12.1 million* £0 *Rounding means these are summed to £48 million.
Estimated new burdens costs of the Homelessness Reduction Bill
*Rounding means these are summed to £48 million.
The Government have been working with local councils and the Local Government Association to test the methodology behind the estimated costs, as well as the core assumptions within it.
We will continue to work with local councils and the Local Government Association to develop the distribution model for the funding. This will reflect differing need in different authorities.
I also intend to consider the case for making available a small amount of further funding for local authorities in high-pressure areas to manage the transition to the new duties in the Bill.
This would be in addition to the level of funding provided to meet our commitment to fund new burdens.
Phalanx Availability Contract: Contingent Liability
The Secretary of State for Defence has retrospectively laid before Parliament a Ministry of Defence (MOD) departmental minute describing the contingent liability within the Phalanx close-in weapons system availability contract with Babcock Marine.
The departmental minute describes the contingent liability that the MOD will hold as a result of placing the new Phalanx availability contract, which will provide continuous support to the Navy’s operational fleet of ships. The maximum contingent liability against the MOD is therefore £268 million over the two-year life of the contract.
It is usual to allow a period of 14 sitting days prior to accepting a contingent liability, to provide Members of Parliament with an opportunity to raise any questions. I apologise but on this occasion it was not possible to do so.
However, a break in the contract with Babcock Marine would have resulted in potential severe operational impact to the support of Phalanx, particularly those on-board ships deployed on operations and requiring contractor support to repair them. As such, and by exception, I approved the awarding of the new support contract with Babcock Marine from 22 December 2016, to come into effect from 31 December 2016. This ensures that support provided to Phalanx was not interrupted.
In accordance with the procedures established for cases of special urgency, the Department wrote to the Chairs of the Public Accounts Committee and the Defence Committee on 23 December 2016, in advance of incurring this liability, inviting them to respond with any objections. No such objections have been received.
I apologise that the Ministry of Defence did not allow 14 sitting days for Members of Parliament to signify an objection. Contracts of this type do not normally fall within the parliamentary notification requirement, and it only became apparent that this contract was different late in the process. I have asked Ministry of Defence officials to ensure that these exceptions are identified earlier in future.
The Treasury has approved the proposal. If, during the period of 14 parliamentary sitting days beginning on the date on which the minute was laid before Parliament, a Member signifies an objection by giving notice of a parliamentary question or by otherwise raising the matter in Parliament, I undertake to examine the objection and respond to the Member concerned.
Environment, Food and Rural Affairs
International Whaling Commission: 66th Meeting
I was unable to attend last year’s meeting of the International Whaling Commission (IWC66) on 24-28 October 2016 in Slovenia but there was a strong UK delegation present.
This meeting marked the 70th anniversary of the international convention for the regulation of whaling and the 30th anniversary of the global moratorium on commercial whaling. I am happy to report that all UK objectives for this meeting were achieved and, as always, the UK worked tirelessly behind the scenes to influence and support crucial decisions intended to improve the conservation and welfare of cetaceans. The UK also ensured its long standing opposition to commercial whaling and whaling under special permit (scientific whaling) was made clear at every appropriate opportunity. As with previous meetings, there was the need for careful negotiation at times but overall the dialogue was constructive despite the fundamental differences in views.
I was pleased that a number of important resolutions were adopted. In particular, IWC adopted a resolution on the need for action to address the alarming decline in the critically endangered Vaquita. In line with the agreed position of EU member states, the UK voted in support of the proposal. This was aligned with the UK’s negotiating position and represents a good outcome. The Vaquita, a small cetacean found in Mexico, is under significant pressure from bycatch driven by the illegal trade in the Totoaba. With an estimated population size of only 59 individuals, action is needed now and so I was encouraged that parties were able to put aside their disagreements on whether the scope of the IWC extended to small cetaceans in order to make this important statement.
I was also encouraged to see decisions taken on further modernisation of the organisation through institutional and governance improvements agreed by consensus, and the expansion of research efforts into important threats to cetaceans such as contaminants passed by a vote. These are important steps forward. In line with the agreed position of EU member states, the UK supported both of these proposals. This was aligned with the UK’s negotiating position and represents a good outcome.
Reflecting on previous unsuccessful proposals for “small-type coastal whaling”, Japan proposed a process for intersessional dialogue to address issues relating to fundamental differences of positions within the IWC. An informal process to discuss such issues was established. The UK will maintain a careful watching brief on this matter.
I was disappointed that Japan announced its intention to begin a new 12 year programme of whaling under special permit in the North Pacific. In collaboration with other EU member states, the UK will ensure a strong co-ordinated statement is made in response to this announcement. The UK will continue to oppose the issuing of special permits on the basis that there is no justification for lethal scientific research on whales. I was, however, pleased that a resolution was passed that should help strengthen the role of the IWC in considering special permits, albeit not by consensus. In line with the agreed position of EU member states, the UK voted in support of the proposal. This was aligned with the UK’s negotiating position and represents a good outcome.
A proposal brought forward by Japan, Cambodia and Ghana to create a fund to strengthen the capacity of Governments of limited means to participate in the IWC did not achieve consensus. Because consensus could not be reached with parties, EU member states were instructed to abstain from the vote. A number of other anti-whaling countries also abstained. The resolution passed which is an acceptable outcome for the UK; although we will keep the development of the fund under close scrutiny to ensure appropriate safeguards and restrictions are in place.
Once again I am pleased to report that the UK, in line with the agreed position of EU member states, voted in favour of establishing a South Atlantic whale sanctuary. Unfortunately the proposal failed to gain the three-quarters majority required for adoption. This will be re-tabled at the next meeting in 2018, which was announced as being hosted by Brazil.
Finally, I was pleased that the UK-led work to progress the consideration of non-hunting threats to cetacean welfare was well received. A number of important recommendations were proposed to allow this important and ground-breaking work to continue. These were agreed by consensus meaning the UK can continue working closely with NGOs and academia to move this to the next stage.
In conclusion, this was a successful meeting and the UK made clear its continued strong opposition to commercial and scientific whaling. We now turn our attention to building for the 2018 meeting in Brazil, and will be working very closely with civil society in order to continue developing and delivering tangible improvements to the conservation and welfare of cetaceans globally.
On 23 June, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. Within IWC, until exit is concluded, the UK will continue to operate as part of the EU. Once we leave the EU, we will regain the ability to speak and vote independently at IWC and will be able to form broader coalitions to promote the conservation of whales and cetaceans.
High Speed 2, Phase One: Government Response to the Lords Select Committee Report
I am today publishing the Department’s response to the special report from the House of Lords Select Committee for the HS2 Phase One hybrid Bill that was published on 15 December 2017.
The Lords Select Committee was tasked with considering petitions from those specially and directly affected by the Bill and subsequent additional provisions to the Bill. Their first special report concludes the Committee deliberations which began in May 2016. The Lords Select Committee considered 822 petitions lodged against the HS2 Phase One hybrid Bill. Of these, the locus of 278 petitions was successfully challenged. Of the remaining 544 petitions the Select Committee heard 314 petitions in formal session, with the remainder withdrawing, or choosing not to appear before the Select Committee, mainly as a result of successful prior negotiation with HS2 Ltd.
The Select Committee’s recent report summarises their hearings and contains modifications to the Bill powers, directions for action by the promoter in a number specific cases and more general recommendations on what actions the promoter should take on a range of other issues.
In responding to the Select Committee we have confined our response to those areas of the report where the Select Committee has requested the Government take action or where we believe a further clarification would be beneficial.
Alongside the response to the Select Committee report, we are also publishing the Statement of Reasons Command Paper. The Statement of Reasons is required by Parliamentary Standing Order 83A in order to assist the House of Lords during the Third Reading of the HS2 Phase One hybrid Bill. This document summarises the work that has already been done to assess, control and mitigate the environmental impacts of HS2 Phase One, and explains why the Government continue to take the view that the HS2 Phase One project is worthy of Parliament’s support.
Copies of the response to the Select Committee can be found on the www.gov.uk. website. Copies of the Statement of Reasons will be made available in the Libraries of both Houses.