Examination of Witnesses (Questions 280
THURSDAY 8 DECEMBER 2005
MP, MR JON
Q280 Chairman: I gather from the
announcement in the House and from your comments here, Chancellor,
this scheme is a bit flexible yet and maybe it is something the
Committee will look at.
Mr Brown: I hope your Committee
will feel able to look at the terms of the understanding between
the banks and the Government.
Q281 Chairman: We may have some ideas.
Mr Brown: You may have some ideas
about how in certain areas the money could be spent. I do assure
you that this is a first step to a resolution of what has been
an issue which I think all governments have been having to deal
with over many years.
Q282 Damian Green: Chancellor, in
the new spirit of consensus which seems to be breaking out this
week, let me say that in previous years it is true on forecasting
growth many times you have been right and the forecasters have
been wrong, and indeed you seldom neglect to point that out to
them. On the same basis, do you admit this year on the whole they
were right and you were wrong?
Mr Brown: I do not know if anybody
has been right this year, to be honest. I think this has been
one of the difficult years. The reason, let us be clear in this
spirit of consensus which is not just about what has happened
in the past but what has actually happened this year, is that
first of all we have had an international shock, there is absolutely
no doubt about it; the volatility of the oil prices but also the
size of the change in oil prices and the uncertainty which arises
from that. Secondly, that has had an effect particularly on European
domestic demand and therefore our biggest export area has been
affected and there is lower growth of domestic demand particularly
in Germany and the Netherlands, which are two of our competitor
countries. Then, as I said in the Pre-Budget Report, and I do
not think people should forget this, we were dealing also with
a domestic issue of inflationary pressure, and throughout the
whole of the last year, 2004, we were seeking to deal with the
situation particularly through interest rates, where house prices
have been rising by about 15% a year for three years, where house
prices at their peak were rising by 25%, and we had to cool down
both the housing market and consumer demand in the economy. I
put it to you that in any other decade when we either had an oil
shock or we have had a hit to the housing market in this way,
when we have had to cool down the housing market, in each of these
situations we have usually in Britain had to deal with this with
a recession, in other words the over-heating has been such that
it is only cured by interest rates and in some cases they have
gone above 10%, but to have both of these together is the difficulty
which had to be faced during the course of this year. That is
why I think we should say that to have reached the end of the
year with inflation likely to be 2%, our inflation target, where
in previous years it could be anything above 10%, is a success
for the policy of stability. So I think people will look back
on this year and say the economy was challenged, and I did say
it was a difficult and challenging time, it was a tough time for
the economy but that challenge has been met by us being able to
deal with the inflationary problem, both domestic and international,
and as we move into next year people can be more confident about
Q283 Damian Green: Thank you. That
came quite close to an admission that the Treasury was wrong in
its forecasting, which is a historic break-through for transparency
in government. Apart from all the reasons you very validly give,
the Governor of the Bank of England has said that one of the additional
reasons why there was this slow-down which the Treasury failed
to forecast was the quite sharp rise, to quote him, of two percentage
points in the ratio of taxes to household disposable income. So
it was actually tax rises which contributed to the slow-down.
Do you accept the Governor's analysis?
Mr Brown: I actually think the
Governor probably, on reflection, would also talk about the rise
of interest rates. If interest rates rise four times, it is bound
to have an effect on consumer demand, and it is bound to have
an effect on the housing market. I do not think anybody should
be in any doubt that four rises in interest rates, which actually
happened before the General Electionthe first time that
has happened in 100, 200 years of economic policybecause
we made the Bank of England independent, was bound to be the major
factor in affecting consumer demand in the economy.
Q284 Damian Green: Exactly, and that
is why the MPC is independent, which everyone welcomes. The point
the Governor was making was that apart from the Bank's legitimate
role in dampening down inflation through interest rate rises,
tax rises were also contributing to the slow-down, and presumably
that is not supposed to happen. We are not supposed to set fiscal
policy for reasons of old fashioned demand management.
Mr Brown: I do say that one has
to look at all the factors here. If you look at what has actually
happened over the last year, wages have been rising slower than
we expected. One of the reasons why income tax receipts are less
in some areas than we might have thought, and one of the reasons
why consumer spending is lower, is not only because we have had
the four interest rate rises I have referred to but actual pre-tax
wage rises have been lower than expected. So I think you have
to take that into account as well. I think those people who are
looking for one explanation of what happened during the course
of the last year are wrong because there are two separate factors,
and in each of them there are particular characteristics of the
change which took place. One is the international shock which
arose from oil prices and clearly with America having inflation
now of 4.3% as a result of the oil rise, they are having to deal
with higher interest rates with that inflationary pressure, but
equally we were dealing with a domestic challenge and the challenge
was house prices rising too fast, consumer spending having to
be slowed down. If you ask me what the situation is at the end
of the year, in any other decade these two factors coming together
would have brought the British economy into recession. In our
case, because of the policy which was essentially the pro-active
and pre-emptive policy of the Bank of England, we have slowed
the economy, but at the same time we have done so avoiding a recession
and having inflation now near to target at the end of the year.
Q285 Damian Green: The panel of economists
we had in front of this Committee yesterday, broadly speaking
agreed that they were less optimistic looking two or three years
out than the forecast in the Pre-Budget Report. Again, you say
everyone was wrong this year, but why do you think you are right
to be more optimistic than the consensus about what is going to
happen later this decade?
Mr Brown: You quoted the Bank
of England only a few minutes ago, the Bank of England's forecast
for next year is 2½%, our forecast is less than that, so
we are not being over-optimistic about next year, and I do not
think people would say that we are being over-optimistic about
next year, and I think that is the case. The Bank is 2½%,
we are 2.25%, if you take the range.
Q286 Damian Green: I was thinking
further than that, because I think everyone would agree that one
of the reasons for growth in recent years has been the rapid growth
in public spending, and what we see in this PBR is the nearest
we have come to a squeeze. If you look from 2007-08 onwards, the
growth of spending is projected to be 1.8% below the trend rate
of growth in the economy. Are you planning to share the fruits
of growth between public spending and other priorities?
Mr Brown: The figures that we
have put for the period after 2008 are the assumptions that have
been in our documents for many years now.
Q287 Damian Green: But as they come
closer clearly they become whole life projections.
Mr Brown: Hold on. These are not
new figures. These are figures that we have used on many occasions
before. They were published before the general election; indeed,
they were published a year or two before. We have got a spending
review in place. It will have to report next summer and we will
have a full report in 2007. I think you should wait until you
see the final documents as they appear.
Q288 Damian Green: So we should not
take these figures very seriously?
Mr Brown: What you should take
is the figures that we have been working on, not just for this
year but for many years.
Q289 Damian Green: Looking further
out again at the long term financing aspects, the long term public
finance report, the analysis of fiscal sustainability points out
that at the current rate of progressthis is taking 5.1
on page 45the amount of spending done by the public sector
as a percentage of GDP by the middle of this century will rise
to 45%. Do you think that will be sustainable?
Mr Brown: I think you had better
look at the assumptions that were made there. These are cautious
and prudent in the sense that we are assuming, for example, on
pensions something that we have not decided. I wrote to the Chairman
of the Pensions Commission, Lord Turner, and said that he could
not assume that we would raise pension credit in line with earnings
after 2008 simply because we had always put in our figures cautious
assumptions about what pensions might cost in the years to 2050,
so these figures cannot be taken as either definitive or the figures
that would eventually be the right figures. I think you will find
a table in that document showing why the pension figure is in
a sense the worst case scenario rather than the figure that we
expect to be reached. In fact, by our announcement about the pension
credit it shows that that figure will not necessarily be the right
figure at all.
Q290 Damian Green: And you would
not wish it to be the right figure, I take it, from that answer?
Mr Brown: The point I am making
is that there are a lot of decisions that have to be made about
2008 and then about the spending round after that, and you cannot
take that to be the figure, no. It is not the correct figure.
Q291 Damian Green: And pensions are
a significant contributor then? That is one of the problems. You
have made the point several times in the past few weeks that Lord
Turner should not make that assumption.
Mr Brown: I think people know
the situation. Alan Greenspan is finishing his term as Head of
the Federal Reserve by warning America about the cost of pensions
over the next period of time. The German and French Governments
already spend 10% of their national incomes on pensions. These
figures will rise to 15% or 16% by 2050 in these countries and
I am determined that we only make decisions that are affordable
for the long term. You cannot take the figures that are in that
document as anything other than cautious figures, but figures
that we do not think are the figures that are the basis on which
we will plan our policy for the years ahead.
Q292 Mr Ruffley: Chancellor, you
have got a bit of previous, have you not, on fudging and fiddling
figures? I want to ask you some questions about the changes to
the length of the economic cycle which, of course, influence whether
or not you meet your golden rule on borrowing. You have made two
major changes this year, conveniently since the Budget and since
the general election. In July you moved the start date of the
current economic cycle back two years so you could conveniently
include two years of Budget surpluses. Now, this week, you have
moved the end of this cycle, the projection, to 2008-09. When
my colleague, Mr Fallon, asked this question in July about moving
the cycle back two years to 1997, he said, "But the redefinition
of the cycle does help you meet the golden rule . . .", and
you said, "My view is it would meet the golden rule anyway".
That is not true, is it, Chancellor? If you had stuck to the original
start and end dates, 1999 to 2005-06 from the independent IFS,
you would have broken your golden rule by nearly two and a half
billion. That is what Robert Chope tells us.
Mr Brown: I do not accept any
of these figures.
Q293 Mr Ruffley: Why not?
Mr Brown: I am going to pass round
to the committee
Q294 Mr Ruffley: Why not?
Mr Brown: If I am allowed to pass
round to the committee a document that shows what actually happened
between 1997 and 1999
Q295 Mr Ruffley: That was not the
question. If you had kept the economic cycle from 1999-2000 and
2005-06 you would have missed your golden rule. What I am saying
to you is that in July you said, "It does not matter. We
would meet it anyway". That is not true. You got it wrong,
did you not?
Mr Brown: I am sorry, Mr Ruffley.
The facts are that there was no complete cycle between 1997 and
1999. If the facts are that there was no cycle then we cannot
allege that there is a cycle now. I am passing round these figures
which I would ask the Committee to look at in some detail.
Q296 Mr Ruffley: I would ask the
Committee just to look at the National Audit Office assumptions.
Let us get on to this. You raised the issue. They talked about
this change in the economic cycle, so it starts in 1997. They
used the word "uncertain" throughout the report and
I am talking about the NAO report published this Monday by the
Comptroller & Auditor General. Let me quote this for you in
case you have not read it closely enough. He says, "I recommend
that the Treasury considers more systematically than previously
what estimates of the output gap would be if other techniques
were used", and that, of course, impacts directly on your
decision to extend the economic cycle to 2008-09. Is that not
Mr Brown: I would ask you first
of all to look at the information I have put to this Committee.
Q297 Mr Ruffley: I am asking you
about what the Comptroller & Auditor General says. I want
a response to his question.
Mr Brown: I would ask the Committee
to look at the information I have given them.
Q298 Mr Ruffley: You are not answering
Mr Brown: I am answering your
Q299 Mr Ruffley: Could you answer
the questions I ask rather than the ones you want to imagine I
Mr Brown: Paragraph 77, "Though
there are many uncertainties, there are reasonable grounds to
date the end of the previous economic cycle in 1997". That
is what he says.