Examination of Witnesses (Questions 160-179)|
12 DECEMBER 2006
Q160 Mr Gauke: And, for shorthand,
if I say "185,000", there or thereabouts, are we talking
about EU or non-EU migration? What is the balance?
Mr Ramsden: As we set out in the
supporting document that we published alongside the PBR and it
is also set out in the NAO audit of our cautious trend growth
assumption, we have done an analysis looking at trends in the
Commonwealth, including new Commonwealth, in the rest of the world
which included A8 up to 2004 when they joined the EU. We have
included migration out of Britain and we have included migration
inwards from the EU15 and it is fair to say that in the data the
strongest trend is actually from Commonwealth countries. Indeed,
if you look at the disaggregated ONS data, the average net inflow
of migrants from the new Commonwealth countries was 110,000 a
year in 2004 and 2005, so we have taken account, and that trend
was established back in the 1990s, but our analysis, and other
people's because external forecasters have done this as well,
has tried to look not just at the very recent figures for A8,
which are difficult obviously to project, but these underlying
trends, so those all feed into our migration projection.
Q161 Mr Gauke: The return to 2.75
for trend growth obviously has an impact on revenue and that is
very clear, but the point which was made to us by Martin Weale
yesterday, and indeed in his written submission, is that there
does not appear to be any evidence that the impact on public expenditure
of this population growth is included. Is there anywhere within
the document or within your projections for public expenditure
that you have explicitly taken into account the increase in population?
Mr Cunliffe: There is not an explicit
reference to expenditure, nor is there any explicit reference
to revenue. What happens in the trend growth assumption is that
the economy grows as a whole faster and everything else adjusts
within the model to that. We have never forecast it, but I think
actually Martin Weale did look at forecast it.
Q162 Mr Gauke: If you are having
a growing population in a year, the economy is going to grow,
but the demands on public expenditure will also grow. I know,
for example, that police forces are spending a lot more on interpreters
now than they were three or four years ago, to give you just one
small example and there are many. Is that factored into your public
Mr Cunliffe: I would make three
points. First, I think the studies which have been done, and the
National Institute did one, suggest that immigrants contribute
more fiscally than they consume, and that is why it is interesting
it was Martin Weale because I thought he did that work. The Home
Office has also not done that. So you would expect there to be
a benefit. Secondly, we have not put into the revenue projections
or the expenditure projections the ways in which immigrants might
particularly increase one aggregate or the another aggregate.
What we have done is increase the trend growth of the economy.
That runs through the model generally. Where the economic model
generates fiscal costs and where it generates receipts, that is
followed through. Within departments' current expenditure plans
will be whatever plans they have to deal with the costs of migration,
so that will already be within departmental plans. When we get
to the CSR, it will be within their plans going forward., but
I think you have to distinguish between that from the economic
model which looks at the economy as a whole and then the aggregate
numbers are fed into the various fiscal forecasting models and
they project fiscal costs and receipts accordingly.
Q163 Mr Gauke: Moving on to now to
the golden rule, and of course the reversion of the trend growth
assumption is that the economic cycle comes to an end earlier
than it was otherwise going to do, we received evidence from Martin
Weale yesterday on this issue of the economic cycle, arguing the
fact that the economic cycle came to an end in 2003-04 and the
new cycle started then. Did you give any consideration to applying
the economic cycle in that way?
Mr Cunliffe: First, can I say
that the change in the trend growth rate makes no difference.
It has nothing to do with the dating of the economic cycle.
Q164 Mr Gauke: It was the growth,
yes, thank you.
Mr Cunliffe: What has changed
our view of the economic cycle was the ONS revisions in July of
this year and the faster growth that we have had than we were
forecasting. It is those two things. The ONS revisions also changed
the middle a little bit, the pattern of growth. Our view in 2003-04
is that the economy did not move decisively through trend. When
the Chancellor came to the Committee in, I think, July 2005, we
published a Treasury document on how we decide when the cycle
starts and ends and we made clear that what you would want to
see is either a decisive move through trend, to what you would
normally see, or, conceivably, the economy comes back to trend
and stays on the trend level for a long time. But actually 2003-04
did not look to us like a decisive move through trend, particularly
when you looked at the other indicators, inflation, earnings and
some of the capacity indicators we used to confirm it.
Q165 Mr Gauke: How much of that is
a judgment call or is it very obvious? Are you applying a degree
of judgment, and I am not necessarily saying it is a wrong judgment,
but it is quite a difficult call to make?
Mr Cunliffe: You cannot observe
the economic cycle directly and you cannot observe the trend rate
of the economy directly, therefore, there are judgments in all
of this. What you try and do is make judgments openly based on
a sort of transparent methodology and allow yourself to be judged
against the judgments you have made, which is what we do. But
there is an element of judgment in deciding where the cycle is
and there is an element of judgment in deciding around determining
the trend rate.
Q166 Mr Gauke: Looking forward to
the next economic cycle, we were specifically asked yesterday
by the experts to ask you as to when the new cycle will begin
and will 2006-07 count as part of the new cycle, as I think has
been the case in the past, that the end year, if you like, counts
in both the old and the new cycles?
Mr Cunliffe: I am very happy to
answer that, but I should make clear that what we are talking
about is our forecast and the actual dating of the cycle has been,
and will be, a backwards-looking exercise. You base the dating
of the cycle on the economic data. You forecast on what data you
have, but then you look to see, and you certainly wait for the
end of the year in question. You look at the economic data and
then you date it. That is how we have done it in the past and
that is how we are doing it.
Q167 Mr Gauke: So it is a forecast,
not a conclusion?
Mr Cunliffe: Our forecast is early
in 2007, which I would expect to be in the fiscal year 2006-07,
but we will not have, bearing in mind what happened last year
and particularly the revisions from the ONS in July, the final
data on that, the first of the first is the yearly view of it,
until the ONS blue book in the summer.
Q168 Mr Gauke: So you will not know
for sure until July when
Mr Cunliffe: No, we will not know.
Q169 Mr Gauke: But whenever it does
end, whichever year it is, will that year count for both the old
cycle and the new cycle?
Mr Cunliffe: That is what we have
done in the past.
Q170 Mr Gauke: Is that what you are
going to do in the future?
Mr Cunliffe: I do not know what
we are going to do in the future.
Q171 Mr Love: You have revised down
your growth forecasts for 2008. Can you go into the reasons why
you have decided that.
Mr Cunliffe: It is very much to
do with the point we have just been discussing on the economic
cycle and the ONS revisions. Effectively, what the ONS released
in July of this year was a picture in which past growth had been
0.25% higher, I think, in 2003, 2004 and 2005 and that we have
had economic growth of about 0.5% more in 2006. If you take that
together, it means the level of GDP is closer to its trend level.
There has been 1.25% more GDP growth in the past or to date and,
therefore, the level is closer to its trend level and it is the
difference between the level of GDP at present, not the growth
rate, but the level at present and its trend level which gives
you the output gap, so basically the output gap got smaller because
of the ONS revisions, and I think when I came before the Committee
at the Budget I said that that might happen. With the output gap
smaller, there is less room for future growth because our forecasting
model, as set out in the Pre-Budget Report, assumes the economy
comes back to trend over two or three years, so, if it is closer
to trend now, it has less growth to make up to come back to trend
and effectively growth is higher this year than in the past forecast
and it is 0.25% lower in 2008 as a result.
Q172 Mr Love: You have not taken
into account any assumptions about business investment, international
trade, anything of that nature.
Mr Cunliffe: Their forecasting
up to 2008 is different from forecasting the next year ahead.
For the next year ahead you can forecast by looking at manufacturers'
surveys, service industry surveys, intentions, and that gives
you some idea of, if you like, the momentum in exports, in business
investment and in consumption, but, when you are looking more
than two years ahead, it is very difficult to project. We anchor
our forecasts two years ahead by a view of where the economy's
trend level of output is, is it above or below trend, and then
the view that the economy will return to that trend level over
two or three years. So the 2008 change is really to do with those
medium-term issues rather than anything we can see now at the
end of 2006 which might then be impacting business investment.
We have increased business investment in 2007 and I think the
2008 forecast is very similar to the Budget.
Q173 Mr Love: Let me just press you
finally in relation to questions which were asked earlier on about
what is happening to the US economy. The Governor, when he came,
said to us, "Oh, don't worry, it is only 20% of our trade
and Europe is over 50% of our trade", but taking the assumption,
and I think you commented on it, about the stronger link that
appears to exist in the United States between house price movements
and consumption and the multiplier effect internationally that
the recession, if I can call it that, although that is too strong
a word, the downturn in overall demand in the United States might
have on the euro area as well as on the United Kingdom, tell me
what you think the likely risk of that is for the future export
performance of the United Kingdom economy.
Mr Cunliffe: First, if I said
that the US had a stronger link between consumption and housing,
then I should not have done.
Q174 Mr Love: No, that is an example.
I was obviously trying to lead you!
Mr Cunliffe: It certainly has
a stronger link between housing and residential investment because
what happens in the US is that, when the housing market expands,
there is a lot more room to build new houses, whereas in the UK,
as you can see from the Kate Barker work, the supply response
in the housing industry is nowhere near as strong. What has slowed
down the US GDP at present is not consumption slowing quickly
because the house prices are not growing as fast, but what has
slowed down the US GDP is residential investment. People are not
building houses and housing construction has gone down. I do not
know what the link is yet and I do not know what the link in the
UK is and I would not want to say what the link in the US is.
If the US economy were to develop a much more broadly based slowdown
and instead of slowing down to growth rates, I would go with the
mid-2s next year, and I think you said went into recession or
whatever, would that have an impact? It would have an impact on
our trade. It would have an impact on the eurozone, although the
eurozone's exports to the UK, as Jean-Claude Paul Trichet has
said on a number of occasions, are larger than their exports to
the US, so we are a more important trade partner for the eurozone
than the US. The channel, I think, might come much more through
general confidence effects, through the Stock Market and the like,
but we do not see that. We see that as a risk, but we do not see
it as the majority sort of probability that that might happen.
And certainly the evidence is not there so far.
Q175 Mr Newmark: I have two or three
technical questions, I am not sure whether they should be for
Dave or for Jon, but the first is: how likely is it that the ONS
will reclassify more debt, which was previously off balance sheet,
as on balance sheet? The reason why I ask this question is because
I know the ONS added £1.25 billion of PFI debt in August
in 2005 and then £5 billion in February 2006 and then a further
£4.95 billion in September 2006.
Mr Ramsden: Perhaps I might start
on that and Mridul might want to come in on the detail. We have
taken account of those revisions as they have been made, including,
as you have highlighted, the recent revision in September to bring
in finance leasing and that has been one of the key factors that
has led to our net debt forecast being very slightly higher for
the forecast period, but that reflects the upwards revision in
the data. The ONS is operationally independent for these purposes,
so it is for them to decide as and when, in line with international
classifications, to bring these classification issues when they
crystallise in the public finances data.
Ms Brivati: I am not sure I have
much to add to that. To the extent that the ONS is an independent
body and it determines that specific items are off balance sheet,
they do not figure for the purposes of net debt and impact on
the Sustainable Investment Rule.
Q176 Mr Newmark: Is not the purpose
of doing stuff off balance sheet the transfer of risk and, if
you can transfer risk, you move stuff off balance sheet, but is
there not a pattern beginning to build up which shows that some
of these public sector projects which have moved off balance sheet,
when there is a problem, they ultimately come back to bite the
Government in the arse which is why more and more debt, which
was previously off balance sheet, seems to be dripping each year
on to the balance sheet? Is that not a problem or an issue?
Ms Brivati: Well, the decisions
as to whether a particular project is on or off balance sheet
are made on a case-by-case basis and there are very many of those
cases, so I am not sure that I could give you chapter and verse
on any of them really, but I do not think I would agree that there
is a pattern. I am not sure what evidence there is for that so
far. Certainly there are cases
Q177 Mr Newmark: Well, the evidence
is that each year more and more stuff, which was originally off
balance sheet, is coming on balance sheet, but, if it gets to
a point where a significant reclassification previously off balance
sheet suddenly reaches sort of a tipping point and breaks the
sustainable investment rule ceiling of 40%, would you have to
then change the ceiling or not?
Ms Brivati: That is a hypothetical
question about the sustainable investment rule which Jon might
like to answer, but in terms of how we actually operate under
the sustainable investment rule, we deal with the rules as they
are and with the numbers as they are which ONS determine for us.
Mr Cunliffe: There is not much
to add to that. The rule is clear.
Q178 Mr Newmark: It is all great
government speak, but let me ask my second question. What is your
estimate of the present value of the Government's public sector
pension liabilities and, when you answer that question, can you
tell me what discount rate you are using?
Ms Brivati: The number I have
for that is £530 billion. I am not sure what the discount
rate for that is, whether it is the green book discount rate.
Yes, the discount rate for that would be the one that is in the
Mr Newmark: It is higher than a risk-free
rate, but that is okay.
Q179 Mr Love: It is the standard
Ms Brivati: Yes, the standard
rate, thank you.