Examination of Witnesses (Questions 113
- 119)
WEDNESDAY 7 DECEMBER 2005
MR JON
CUNLIFFE, MR
DAVE RAMSDEN,
MR TONY
ORHNIAL, MR
JOHN KINGMAN
AND MS
MRIDUL BRIVATI
Q113 Chairman: Mr Cunliffe, good
afternoon to you and your colleagues. Can you introduce them for
the shorthand writers, please?
Mr Ramsden: On my far right I
have Tony Orhnial, who is Director of Welfare. On my immediate
right is Dave Ramsden, Director of Budget and Taxes. Mridul Brivati,
on my left, is Director of Public Spending. John Kingman, on my
far left, is the head of the Enterprise and Growth Unit.
Chairman: Where is our big pal, Nick
Macpherson? Is he too important for us now?
Q114 Mr Mudie: Good question!
Mr Cunliffe: It has been the practice
of this Committee for a number of sessions to make do with me,
Chairman. After Gus O'Donnell was promoted I took over from him
and we have just continued from that.
Mr Mudie: The human face of the Treasury!
Q115 Chairman: You should take it
back to him that we miss his humour. Maybe he could come back
to us at some time. Is he coming tomorrow with the Chancellor?
Mr Cunliffe: I am not sure.
Q116 Chairman: He should do.
Mr Cunliffe: I will let him know.
Q117 Chairman: Okay, right. Despite
concerns expressed by the Committee in the last Parliament about
the lack of notice for the PBR—the date was only announced
two and a half weeks ago—we now find ourselves under pressure
to get everything done before Christmas. Can you explain to the
Committee why the Treasury has such difficulty with short notice
of the PBR when it gives a month's notice for the Budget?
Mr Cunliffe: I think this year
we had to fit the PBR in also with the UK's Presidencies of the
European Union and of the G7/G8. There was an extra G7 meeting
which took place on Friday and Saturday in London which the Chancellor
chaired. That had to be factored into the equation. I think there
were a number of other commitments around Europe that had to be
factored in. It was actually quite difficult to arrange the date
until these other things had been fitted in around it.
Q118 Chairman: You should be mindful
of the problems and pressures it causes us as a Committee, particularly
our staff.
Mr Cunliffe: I apologise for that.
Q119 Chairman: You attribute the
slowdown in UK growth in 2005 to statistical revisions, higher
oil prices and weak demand in the euro area and some weakness
in domestically generated demand. Could you break that down for
us in terms of the relevant influences and contributions to slower
growth?
Mr Cunliffe: Those are the main
factors. I would also add there is also the slowing of the housing
market and the increase in interest rates which were forecast
to happen but may have had a larger effect than we forecast. On
the revisions to the forecast, as we say in the PBR, the straight
arithmetical effect of that is to take nearly 0.5% off our growth
forecast. That is simply for any given path of quarterly growth
the way that forecasters work. You start at the end of the previous
year and if the end of the previous year is lower than you had
thought it was going to be because the statistics have changed
then the path of growth through that year is lower as well. That
is worth about 0.5% on the growth forecast. It is impossible to
be completely precise about where you attribute the rest, which
is about 1.5%. The OECD looked at it one way and said the higher
oil prices and lower import growth in the eurozone in Europe,
which is the UK's biggest export market, together were probably
worth 0.5% on growth. Our figures are not very different from
that. You can also look at the effect of higher oil prices on
households. Mervyn King, I think, made clear in his last press
conference that it is the boring bits of household expenditure
that are difficult to change: heating bills, utilities, and of
course higher fuel costs generate higher oil prices that make
an impact on that. We think higher oil prices together with lower
average earnings growth have probably reduced household disposable
income by around 1%, or maybe over that. If you put it together,
I would say 0.5% of the forecasted effect, broadly 0.5% on GDP
from oil and exports, but oil operating there through a number
of channels, and then the effect on household disposable income
through lower earnings growth most of the remainder. Then, of
course, you overlay on that whether highly geared households slowed
down their consumption more than was forecast with the interest
rate increases and the housing market very successfully being
cooled off. We never quite know what the relationship is between
the increase in house prices and the increase in consumption.
When the housing market was moving up it looked as if that relationship
had become much weaker than it was in the past, but it is quite
possible with the revised numbers we now have for consumption
in 2002-03 it will be strong enough and, therefore, when the housing
market cooled down the effect on consumption is stronger as well.
It is very difficult to know if there is a causal relationship
between those things together or whether there is some other factor
like employment.
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