Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 260 - 267)



Mr Beard

  260. Whether you take the fiscal stance relative to the budget this year or to the PBR last year, there is a loosening of fiscal stance. How much do you believe that is going to support the economy in the next couple of years?
  (Mr Dicks) I am glad you asked me that question because I should like to eat humble pie. Those of you who were on this Committee in the last Parliament might remember that I said at the time of the budget that I thought the fiscal expansion was ill-advised, that it risked exacerbating the growth of demand at the peak of the cycle and might require a response from the Monetary Policy Committee. Now of course I can see it was a stroke of pure genius to keep the British economy moving ahead at a difficult global time. I would slightly disagree with the Chancellor who said that it is the stability orientated policy which he has put in place since 1997. I think it was just a standard pre-election fiscal boost which got lucky. There is no doubt about it that the fiscal side has supported the economy. Household incomes in real terms are rising four per cent this year. The UK consumer is not a complicated beast; put money in our pockets and we go out and spend it. It is not surprising therefore that consumer spending is rising four per cent in real terms. It was with hindsight a well-judged fiscal expansion. It does highlight the difference between our system and the American system. The Chancellor announces cuts in the budget and they come in at six o'clock that same evening. We are able to get on with our fiscal expansion. We may have done it for the wrong pre-election reasons. The United States has to go through the politics of negotiating it. We do have a good consumer in contrast with most other economies and that has kept the British moving ahead. There has been an interesting development on the MPC. They worried that the strength of the pound and increases in public spending would have to crowd out the private consumer, then they worried about the imbalances between the strength of consumption and the weakness of production. Now we are all just happy we have a consumer who is keeping the British economy moving ahead.

  261. In the Pre-Budget Report in box 2 on page 50 it says that the automatic stabilisers' impact can be seen by examining the difference between actual public sector net borrowing and the cyclically adjusted public sector net borrowing position. When you look at Table 2.6 with that in mind, you find that the difference in 2001-02 is zero, next year it is zero, the year after that it is -0.1 and then two zeroes. Is the implication of that not that the stabilisers are not really working?
  (Mr Dicks) No, it is a reflection of the output gap. We are never very far away from trend so the difference between the unadjusted and the cyclically adjusted measures is not very large.
  (Mr Walton) The Treasury never wants to do this but the other point is to look at the change in the cyclically adjusted balance from year to year. In Table 2.6 for instance in 2001 you are moving from a cyclically adjusted surplus on public sector net borrowing of 1.6 per cent of GDP to a deficit of 0.3 per cent of GDP. That is a 1.9 per cent of GDP swing there in the cyclically adjusted balance. If you were just allowing the automatic stabilisers to work, then the cyclically adjusted balance should not change very much from year to year. There is actually quite a big discretionary easing of policy taking place there. You get another discretionary easing taking place between 2001-02 and 2002-03 because it goes from a deficit of 0.3 to 1.1 per cent. At least on the Treasury's numbers you have a 1.9 per cent easing in the fiscal stance this year and another 0.8 per cent easing next year. Changes are as important as levels.

  262. Going back to the stabilisers, is it not implied that if things are as low as this, the response to the slowdown is coming entirely from monetary policy and the fiscal policy is not playing much of a part?
  (Mr Weale) No, that is not the case. If you look at the contribution of the Government to overall growth in demand both this year and the likely contribution next year, then that is a counterpart of the cyclically adjust stimulus David was describing. This is an occasion where despite the fact that they are now run independently, monetary and fiscal policy are by happy chance both working in line and both providing a very helpful stimulus to the economy.
  (Mr Walton) To give you one example, if you look at average earning figures, private sector average earnings growth has slowed to about four per cent and public sector average earnings growth has picked up to about six per cent. That extra increase in public sector earnings growth is rather faster than we have seen in recent years. That is going to help to support the growth in household disposable income which Geoffrey talked about and therefore will help to support consumer spending.
  (Mr Dicks) It is also part and parcel of the need to retain and recruit public sector personnel for example. There has been a genuine attempt to re-balance public and private sector earnings because it was recognised that public sector earnings have got out of line. No wonder people would not sign up for health and education unless there was a real relative pay adjustment.

Mr Plaskitt

  263. You seem to be saying that the golden strategy is to be Keynesian but to be a lucky Keynesian.
  (Mr Dicks) Yes.
  (Mr Weale) Everyone needs to be lucky. All economic managers need to be lucky. I do think that the sort of doctrine which was taught in the universities in the 1970s that fine-tuning did not work has now been completely abandoned. I actually think that with monetary policy we have much more fine-tuning that is desirable. I can see no logic to changing interest rates twice in ten or 12 days for example. There is no clear mechanism by which people should be unable to wait ten days for an interest rate to change. For reasons that I do not understand, the received wisdom is that monetary fine-tuning is a good thing but fiscal fine-tuning is still a bad thing. I agree with the point which was made that in terms of producing dollops of expenditure that has proved difficult to handle, at least timewise, but that is not the only possible means of fiscal fine-tuning. Although I think that the current arrangements we have have worked very well, there is a recognition—perhaps not so much in this document as in earlier ones and I should like to see a general recognition—that monetary and fiscal policy do work together to stabilise inflation and to stabilise the real economy. Yes, that is a Keynesian position. If it works you are a lucky Keynesian.
  (Mr Walton) Before throwing away the prevailing orthodoxy completely, one thing I would just add is that these Government spending plans would have been here whether or not the world economy was very weak or whether the world economy was booming. If the world economy had been booming, we would not have expected the Chancellor to stand up and say he was taking money away from departments. That is why fiscal policy is much less flexible, because once you have said you are going to increase spending on health and education, you are not suddenly going to take it back just because the world economy is a lot stronger. That is where I think monetary policy has the edge because you can change interest rates much more flexibly, whereas with fiscal policy, at least on the public spending side, you are only changing the plans every two or three years.


  264. Before asking whether any of you have final comments, I should like to address a question to Martin. Many of the micro-economic initiatives seem to have been imported from America, the Working Families Tax Credit and other tax credit issues. Little attention has been paid to Europe some would say. Is there anything you think we can learn from Europe as opposed to North America?
  (Mr Weale) One can always learn things from friends and neighbours. One particular area I have in mind is on the question of training, on which there is some discussion. There—whether the model adopted in Britain is imported from the United States I am afraid I do not know—by comparison with continental approaches to technical training, vocational qualifications and apprenticeship systems, it does seem to me that there is a lot we could learn. For example, with apprenticeships, the Government has a quota and is possibly more concerned about meeting its quotas or meeting the targets than actually liaising with the employers to find out what sort of skills are needed in specific areas. Yes, particularly on the question of training, there are things we can learn from the continent.

  265. Could this help productivity?
  (Mr Weale) Yes, I would hope so.

  266. Do any of you have any final comments?
  (Mr Dicks) Given that my working day starts at seven, I wish we had European time. I do not want their money, but I wish we had their time then we could start at eight.

  267. They say this Committee is quite influential, but I do not think we could stretch to that.

   (Mr Weale) May I make one final comment on the budgetary position. It is a point which seems to have escaped, or at least has not been commented on. If you take the budgetary position in the Pre-Budget Report as what is going to happen, then there is more or less room, as far as I can see, to pay for Wanless without tax increases. Obviously the sort of figure I am looking at is that in 2005-06 a surplus is predicted on the current budget of £8 billion. Whether Wanless would cost £8 billion or £10 billion depends how you do the sums. On the Government projections there is more or less the money to pay for it. That said, I very much share David Walton's concerns that if I were producing prudent and cautious projections they would show tax revenues growing only in line with nominal GDP starting in 2003 and not the faster growth rates which the Government has built in. Obviously if it turns out like that then more tax revenue will be needed for extra spending or some areas of spending will need to be cut to pay for extra health spending.

  Chairman: Any comments? May I thank you very much for your attendance this morning. It was very helpful for us. We shall be questioning the Chancellor next Tuesday and no doubt the comments you have informed us with this morning will be used. Thank you.

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