Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 140-159)


12 DECEMBER 2006

  Q140  Mr Breed: So although there is some modest evidence that people are under a bit more pressure with people missing their mortgage payments, a little bit more sort of pressure with a few more insolvencies, some modest rise in repossessions and such, how concerned are you that we are at the beginning of what might be something a bit more serious?

  Mr Cunliffe: I do not see in the indicators of mortgage repossessions and in the survey results on household finances anything like the same sort of distress signals that you saw in the early 1990s. The Bank of England's Quarterly Bulletin and Inflation Report has some information on this. It suggests that a number of households are having problems, although, from the Bank's survey, the problems look to be in the unsecured and the consumer credit area rather than in the secured housing area, so I do not see evidence of problems there. When you look at income gearing, the ratio of the mortgage repayments to income, that seems for the UK historically to be at relatively safe levels. I cannot predict the housing market, so I cannot tell you what is going to happen, but certainly in those indicators you do not see the sorts of distress we have seen at other times when the market has fallen quite sharply.

  Q141  Mr Breed: Although the indications from the banks', not the Bank of England, the ordinary banks' figures lately are a bit mixed where some of their bad debt figures are a bit higher than we might expect and the others seem to have been much better and such, does the Treasury have any view on the macroeconomic effects on the different levels of tightening of bank criteria, which might actually happen, the banks might actually tighten up some of their criteria for lending? Is that going to have any macroeconomic effects?

  Mr Cunliffe: First of all, I think they have tightened up some of their lending criteria, particularly on the unsecured side rather than on the secured, and I think that will affect a number of people. The question is: is that number large enough to have a macro effect. That is really the same question as: are we seeing in the distressed figures, people who are experiencing difficulty. That is a very real problem for a number of people, but are we seeing a macro effect? I do not think so, but my colleague might want to say something on this more generally.

  Mr Ramsden: We keep a close eye on the survey evidence that Jon and you have been referring to. We have had this very latest survey from the Bank of England which presents a pretty balanced picture of the issues that households are facing. We have to obviously take account of the fact that it is a survey, so the extent to which it is representative, it is an established survey and the Bank's assessment was that, compared with last year, I think overall, and you have mentioned some areas where there may be a small increase in the issues for households, but I would not say they are statistically significant compared with last year. We do, at the macro level, pay very close attention to this. Obviously consumption is by far the most significant part of expenditure, so we have to look very closely at what is happening on the side of household finances, but whilst we factor it into our risk assessment, I think the consumption forecast that we have at the macro level is a measured one and there are upside and downside risks to it. The key upside risk, I would highlight, subject to the points Jon has made, is on house prices where the latest data which came out yesterday on some of the measures is showing double-digit inflation increases. Now, that is well in excess of what we were forecasting, but we were standing out amongst a lot of forecasters for saying that we thought there would be a soft landing in house prices and, even though house prices are in double-digit rates, they are still moderated from where they were and we expect them to continue to come down to grow more in line with income, but we are not expecting the kind of real house price falls that some forecasters were projecting; we have not seen any evidence of that.

  Q142  Mr Breed: Finally, on the individual voluntary agreements, are they working out as you broadly had planned or are you very concerned at the number of people who seem to be resorting to them for one reason or another?

  Mr Cunliffe: They were designed, I think, to make it easier for households to cope with debt problems and to be able to adjust their debt and to smooth out the adjustment rather than to have to go into a very sharp adjustment on insolvency. I think the fact that they are being taken up shows that they are meeting that need. There are a lot of stories about how they are marketed and how they are being sold, I think, which the FSA and others are looking at, but the general principle that we try and find a way for households to make a smooth adjustment for those who have debt problems, I think, is being—

  Q143  Mr Breed: So you do not know whether or not they have not been over-marketed?

  Mr Cunliffe: I do not think so, no.

  Q144  Mr Todd: Can we turn to the issue of external trade. How confident are you, bearing in mind the data uncertainties there are following the MTIC trader fraud, of trade data?

  Mr Neale: We are pretty confident that ONS is in a position to adjust the import figures, and it is mainly the import figures which are affected here, as a result of what we know about MTIC fraud. ONS works closely with Her Majesty's Revenue and Customs who pass on to ONS their estimates of hidden imports.

  Q145  Mr Todd: So the answer is you are fairly confident that the ONS are on top of it, but you would not be too certain, bearing in mind our lack of knowledge of the scale of the fraud in question?

  Mr Neale: Fairly confident.

  Q146  Mr Todd: You make a forecast that import growth will be slightly less than export growth in the period in question. On what basis do you make that judgment?

  Mr Cunliffe: It comes back to the macro side. I think we made that judgment on the basis of the consumption forecast and the strength of consumption relative to the strength of the economy and we make the export forecast also on the basis of surveys for next year going forward which are very strong actually as to order books.

  Q147  Mr Todd: Turning to the impacts of the US economy, you have presumably factored that into the possible risks that the economy faces. How does this affect your forecast for the period?

  Mr Cunliffe: The US economy is important to the global economy and there are some big risks out there around global imbalances and the like which we have talked about, but as for the specific trade channel to the UK, the US is a much smaller trade partner for us than the EU. We have put in—

  Q148  Mr Todd: Which of course has a multiplier effect within the world economy as a whole.

  Mr Cunliffe: Yes, and there are other channels through capital markets and the like, but on the trade channel itself, we have got a slowing of the US economy for next year compared to where we were at Budget time. The US had a very strong first quarter in 2006, so the likelihood is that they will achieve 3% growth in 2006. Even though the second quarter was a bit weaker and the third quarter was quite a bit weaker, I think they will still be around 3% there. Going forward, for 2007, most of the commentators have knocked them down by about 0.5% and we are not very different from that, and the IMF has done that, the consensus has done that. That is really to do with the drop in residential investment which they have seen going forward, possibly some effects on consumption linked to housing, the point for the US that we were just discussing. Furthermore, for the UK, there have been some sorts of soft manufacturing survey data and of for the US in November. On the other hand, some of the consumption data which have just come forward have been strong and the last labour market figures that came out on Friday for the US were stronger than people were expecting, so our forecast is for the US to slow in 2007, but not really for it to go into a full—

  Q149  Mr Todd: But you have built into your forecasts some fairly confident export forecasts which must be tough to achieve with the dollar at the rate that it is.

  Mr Cunliffe: Well, the export forecasts, I think, are affected more by the forecasts for the eurozone. We have got the eurozone growing faster this year than we expected, dropping back to about 2%, as I recall, next year and 2.25% thereafter and that is a much bigger determinant.

  Q150  Mr Todd: So you are expecting some rebalancing of exports between the US and the eurozone within your forecast?

  Mr Cunliffe: Yes, and I am expecting the very sharp decline in exports to the euro area that we saw in the first three or four years of this century to correct somewhat.

  Q151  Mr Todd: The decline of the dollar might suggest some unwinding of global imbalances. Do you think it does?

  Mr Cunliffe: I thought the Chairman was going to ask me that question. He always asks me about global imbalances. I think the decline in the dollar that we have seen, and, remember, it has gone down in the last four years by about 25%, is part of the unwinding of global imbalances. The question on global imbalances is not so much whether they will unwind, because I think most economists think they will, but how and whether they unwind in an orderly way. Actually the dollar depreciation that we have seen over the past four years has been pretty orderly. The very recent one that we saw at the end of November was not as big as the dollar depreciation against the euro certainly we saw in the spring, but as it has been quite an orderly process.

  Q152  Mr Todd: Presumably this would be assisted by an appreciation of some other currencies which are under-valued?

  Mr Cunliffe: It has appreciated against the Renmimbi yuan a little bit and it has appreciated against the yen, but clearly a more global rebalancing of the exchange rates must be part of the overall global rebalancing story. The question is: will it happen over a long period in an orderly way or could it be disorderly?

  Q153  Mr Todd: You have been criticised by some for being too sanguine about the future path of inflation with some of the uncertainties identified with the Bank of England. How would you respond to that?

  Mr Cunliffe: I do not think our implicit inflation forecast is at all different from the Bank's.

  Q154  Mr Todd: No, I did not say that. I said they had identified certain uncertainties.

  Mr Cunliffe: The uncertainties we see are pretty much the same as the ones the Bank see. On the supply side, it could be that there is more slack in the economy and the economy has got the potential to grow faster without inflation.

  Q155  Mr Todd: Could it be argued that the Chancellor raising taxes in this PBR may have some impact on inflationary transience in the future which may need to be taken into account by the Bank in their future interest rate policy since it removes some expenditure from the economy?

  Mr Cunliffe: There is clearly an arithmetical effect on the inflation rate of increasing the fuel duty. Whether that will affect long-term inflation trends, I do not think so, and actually the fuel duty increases have been sort of pencilled in for the last year as part of the normal operating, so no, I do not think that will have an effect on inflation transience.

  Q156  Mr Gauke: Can I ask about the trend growth assumption which has gone up from 2.5% to 2.75%. Am I correct in thinking that the reason for the increase is because of a reassessment of the net inward migration of working age population? Is that a correct interpretation?

  Mr Cunliffe: We have revised our population growth forecast, but I should say that the trend growth assumption for this year of and the past stays the same at 2.75. What we have done is that we were going to reduce it from 2.75 to 2.5 because of the effect of the retirement of post-baby boom female workers and that now, we think, is offset by the increase in the population of about 0.2% and that comes mainly from an assessment of current migration trends, yes.

  Q157  Mr Gauke: What sort of numbers are we talking about?

  Mr Cunliffe: The GAD, Government Actuary Department, forecast, although it is actually now done by the Office of National Statistics, the forecast that they had in their 2005 report was for net migration to come down from its peak, and I think it was 235,000 or 240,000 in 2004, to a figure of somewhere between 145,000 and 205,000. We are within that range. It is not an exact figure because what we have done, it is an assumption of population growth of 0.2, but it will be equivalent to a figure of 185-190,000. But it averages out over the period.

  Q158  Mr Gauke: Every year for the foreseeable future?

  Mr Cunliffe: I would say for the next few years. The trend rate, until we change it. If you look at the long-term report, you can see that once you get three or four years out, it is very different and you have to forecast very differently.

  Q159  Mr Gauke: Also, as I understand it, you are not assuming a substantial increase from Romania and Bulgaria post accession?

  Mr Cunliffe: No, that figure seems to have had no increased from the A2—

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