Examination of Witnesses (Questions 268
- 279)
TUESDAY 11 DECEMBER 2001
RT HON
GORDON BROWN,
MP, MR ED
BALLS, MR
GUS O'DONNELL,
MR NICHOLAS
MACPHERSON AND
MR NICHOLAS
HOLGATE
Chairman
268. Good morning, Chancellor. It is a pleasure
to welcome you to your first appearance before this Committee
in the new Parliament. For the sake of the record, could you identify
your team.
(Mr Brown) Yes, Chairman. I also have
a short set of opening remarks to enable you to know about the
documents we have issued this morning. On my far right is Nick
Holgate, who is the Director of Welfare Reform; next to me is
Ed Balls, who is the Chief Economic Adviser to the Treasury; on
my immediate left is Gus O'Donnell, who is the Managing Director
for Macroeconomic Policy and International Finance; and on my
far left is Nick Macpherson, who is the Managing Director for
Public Services. Could I just say by way of helping the Committee,
that in addition to our main Pre-Budget Report, I have published
a set of additional consultation documents on issues ranging from
our new research and development tax credit for larger firms,
to new measures for the environment. On Thursday we will be publishing
our final Pre-Budget Report consultation document which will set
out our new approach to tackling child poverty, combining improved
children's benefits with better education provision, greater support
for parenting and encouragement of voluntary, community and charitable
organisations crucial to family and child support. Can I also
tell the Committee that, in line with our policy of transparency
and openness, at 9.30 this morning we published the concluding
statement of the IMF's 2001 Article IV Consultation on the UK
economy and we circulated copies to the Committee this morning.
It may help the Committee to know that today also saw the publication
of the latest inflation figures, showing inflation down to 1.8
per cent, which is the lowest inflation since 1963.
269. Thank you very much, Chancellor. I will
start with an introductory question on the general economy. Should
we be confident that the UK economy and public finances will come
through the global slowdown in good shape; and what particular
safeguards have you taken against deterioration in public finances?
(Mr Brown) These, Chairman, are testing and challenging
times for every country. As I said in the Pre-Budget Report, no
country can be insulated from what is happening around the world.
We do have a recession in America, a recession in Japan and in
much of Asia; the European area of the economy is barely growing
at all. It is hardly surprising that the effects on world trade
in particular, which has fallen in its growth from 12 per cent
to 1 per cent this year, are felt in every economy around the
world. Why am I cautiously optimistic about the British economy—and
to a large extent this is reflected also in what the IMF have
said this morning about the British economy? First of all, we
start with the foundations far sounder than they were ten or 20
years ago. In other words, we have low inflation and sound public
finances. Secondly, we have had a proactive approach taken, particularly
by our monetary authorities. We have had seven interest rate cuts
during the course of the year. That has brought our interest rates
down to the lowest for nearly 40 years. We are able to do that,
in my view, not simply because we have the new arrangements in
place with the Bank of England, but because they are operating
a symmetrical inflation target which means that deflation is as
worrying to them as inflation. Thirdly, I am cautiously optimistic
because there has been a degree of international cooperation that
has been greater than before; and countries have looked together
at what they can do in each continent to make for a stronger world
economy. That is why we have published our forecast for this year
which is at 2 per cent and our forecast for next year is 2-2½
per cent; and I believe that will increasingly become in line
with what other people are saying about what is likely to happen.
Chairman: To explore this issue a bit
further I will hand you over to James Plaskitt.
Mr Plaskitt
270. Chancellor, the growth forecast for 2003,
looking at table A9 in the Pre-Budget Report, appears to rest
very heavily on recovery of the international economy as the biggest
contributor is trade—exports and imports. To what extent
does that depend on you being right about your feelings about
the US recovery?
(Mr Brown) I think this is what most people are saying
about what is likely to happen in 2003. If you look at the position
of trade, I think it is true to say that trade was growing by
about 12 per cent last year. I think the forecasts for 2003 are
based on trade growing by about 6 per cent. Therefore, it is an
expected recovery in the international trading position. I think
most people feel that America by the second half of next year
will be in a stronger position. I think it is true to say also
that the forecasts coming from Europe are in the same direction.
Therefore, I think it is a not unreasonable forecast of what is
likely to happen in that period.
271. When Mr O'Donnell told us at our last meeting
that there was a very big increase in uncertainty relating to
these forecasts, was he thinking about the international situation
and the extent to which it may be unpredictable?
(Mr Brown) I think he was thinking about what we said
as a Treasury in the Pre-Budget Report, that there are risks.
Obviously the American economy could have a slower bounce-back.
Equally, there are risks of a structural nature; oil prices have
certainly gone down; but there are risks in the oil price, as
we have known from the trebling of oil prices two years ago, to
the virtual 50 per cent fall in oil prices in the last year. Therefore,
there are risks of a structural nature about what is happening
to oil prices. Equally, there are risks in the British economy
if consumer spending grows too fast. Interest rates are extremely
low historically at the moment. There are risks, of course, if
we do not make the productivity improvements that we want to see.
All these are cyclical and structural factors which make this
an uncertain and testing time, as I said at the beginning. I think
that the balanced approach is the one we have given in the Pre-Budget
Report.
272. Are you still confident about that, despite
the fact that since the Pre-Budget Report we have had the third
quarter US figures which show a bigger contraction than we thought
at the time of the PBR and a sharper rise in US unemployment since
the PBR was published? Do those worry you? Do they suggest we
are going to veer off the growth track you predicted, or are they
within the framework you anticipate?
(Mr Brown) It depends. What I said in the Pre-Budget
Report, that the US economy was in recession for two quarters
when there has been a negative growth, I do not think our projections
or forecasts for the new year will be changed as a result of these
two sets of figures. I think there are certain features of this
downturn that are both interesting and make me more optimistic
about the future. Consumer spending has held up in the United
States of America. Equally, in certain production categories like
cars, sales have held up; equally, house purchases have held up.
So there are certain things happening in the US economy not too
dissimilar from what is happening in the UK economy where consumer
spending, car sales and home sales have also held up well. Therefore,
I think the balanced approach is the set of forecasts we have
given.
Kali Mountford
273. I do not want to stray too far into macroeconomics,
but I am concerned within these figures by some sectoral differences,
and particularly in some manufacturing areas where we are seeing
a decline in output. Are you confident that the changes we are
seeing, and looking at the interest rate put in America today
and our own inflation report, that that is actually going to be
enough to maintain all the sectors?
(Mr Brown) The key change, of course, is what has
happened to interest rates where they have fallen very substantially
seven times in the course of a year. It is true to say that the
performance of manufacturing everywhere is disappointing. Manufacturing
output has fallen by something in the order of 11 per cent in
Japan, 6 per cent in America and fallen by something of the order
of 3 per cent in the United Kingdom. If you look at what has actually
happened within manufacturing, as you say, there are sector differences.
Information technology/electronic equipment has seen a dramatic
fall in output right across the industrialised world. It is something
of the order of 20 per cent in some countries, and it is not far
below that in Britain. If you look at some of the other industries
that make up manufacturing—I mentioned cars earlier—the
output of the vehicle sector is up something of the order of 7
per cent; the output of chemicals is up; the output of tobacco
is up; the output of durable consumer goods is up. There is a
huge effect as a result of what started in the IT sector in America
and it has had an effect on Britain; but there are some sectors
of manufacturing that are doing better. One of the measures we
have taken in the Pre-Budget Report is building on what we have
done previously and that will help productivity in these areas
. Certainly what we are doing in terms of helpful investment,
permanent capital allowances, regional venture capital funds,
what the Regional Development Agencies can do, what we are doing
in terms of technology and innovation, research and development,
small business tax credit, the larger tax credit now already in
place as a consultation document, what we are also trying to do
in workplace skills, is improve not only the numbers of apprentices
going into key sectors for the future, there has been a dramatic
increase in the number of apprentices in the last few years but,
equally, we are trying to get to a new position of workplace skills
where there is more encouragement, particularly for small businesses,
to give people the skills that are necessary for the future. In
other areas, like competition policy and planning policy, we are
trying to create far greater flexibility than in the past; and
independent competition authority, and new attention to flexibility
in planning laws for business. All these changes, I believe, are
important to stimulating the greater enterprise culture in the
country.
274. To take one point further because you mentioned
the Regional Development Agencies, and it is a point I have put
to you in the past, I am concerned that a lot of our policies
are dependent on the success or otherwise of the Regional Development
Agencies, and I took your advice and I looked at my own and I
have to say, Chancellor, I was somewhat disappointed in their
strategy for growth in some sectors. What are you expecting to
do to control the activity of Regional Development Agencies—or
if not to "control" because we do not want to be too
centralist—
(Mr Brown) We certainly do not. We want to devolve
that power.
275. What are you doing to encourage them to
do better?
(Mr Brown) We have given them greater flexibility.
Obviously in the first few years of their lives the Regional Development
Agencies have been dealing with existing essentially urban regeneration
programmes; but what they are moving towards is a far greater
interest in the microeconomic and supply side factors that are
influencing the regional economies. I believe their attention
is increasingly on innovation in the region and what has been
done to stimulate new businesses and high technology businesses,
and levels of investment in the region and, of course, the provision
of infrastructure. With all these things you will see the Regional
Development Agencies taking a far greater interest in the years
to come, and with the funds and flexibility to do so which does
not exist at the moment. I regularly meet all the chairmen of
the Regional Development Agencies, and we talk about how they
can actually move using this greater flexibility to increase productivity
in the regions. I hope you will see the effects. I think in some
industries which are experiencing problems, in the textile industry
as well as other manufacturing industries, they can do so much;
but in terms of the long term development of the entrepreneurial
economy I think they can play a very important part in years to
come.
Mr Tyrie
276. Just two quick questions on the overall
presentation of the performance of the economy. We have all heard
that Gus O'Donnell and everyone agrees, and you agree, Chancellor,
that there is greater uncertainty than there has been for some
time; but the spread of your growth predictions is still only
half a per cent. Why did you keep it at half a per cent, and not
widen it?
(Mr Brown) Perhaps we should do a technical note for
you on why there is a range. Under the previous government there
was not this range, but was just one figure that was given. The
range is because of what we anticipate are potential effects of
supply side changes in the economy, productivity, growth. These
are not cyclical factors, these are structural factors that will
depend on what really is the trend rate of growth of the economy
and, therefore, there is a level of uncertainty about that. Therefore,
I saw no reason to vary the forecast in the way you suggest in
having a wider range. We are dealing with the long-term factors
of the economy as they impinge on annual growth rate.[1]
(Mr O'Donnell) We made it clear in the
November 1997 Pre-Budget Report and the November 1998 Pre-Budget
Report that they were opportunity ranges. To quote from that PBR
we say, "The ranges are not an indication of the degree of
forecast uncertainty".
277. My second question is on the output gap.
I cannot remember an output gap graph going above or below the
trend and not being shown to return to the trend. Indeed, that
is what you did show in the FSBR at page 163—a line going
above trend and then returning back to trend. In this PBR at page
150 for the first time ever I think, unless you can correct me,
the output gap is shown to fall below trend and then rise above
trend for one year, which I find, frankly, a little bizarre.
(Mr Brown) I do not think it is bizarre. Anybody looking
at both what we are saying about the British economy and what
others are saying about the British economy accept that it had
been an effect from what has been happening around the world but,
equally, they believe that the monetary action we are taking is
going to have the effect that that will raise growth in future
years.
278. This blip up above trend is the responsibility
of the MPC?
(Mr Brown) I am not saying it is wholly the responsibility
of the MPC.
279. It was a monetary phenomenon?
(Mr Brown) I said the monetary action will have an
effect and I do not think anybody disagrees with that.
1 Ev 62 para 1. Back
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