Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 113 - 119)



  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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