Examination of Witnesses (Questions 347-359)|
8 MAY 2007
Q347 Chairman: Welcome to this second
session of our inquiry this morning.
Mr Barber: May I say that as well
as being General Secretary of the TUC. I am also by coincidence
a member of the Court of the Bank of England. I sat in on the
last session with some interest. Obviously I not am appearing
here this morning in that capacity but from a rather different
Q348 Chairman: May I start in terms
of the written submissions you have both presented? The
Bank of England's has identified what you have identified as two
tailwinds, globalisation and an expansion of the labour supply,
that have provided the impetus for the benign economy over the
past decade or so. The present Governor has mentioned that things
will not be so nice over the next decade. Is enough being done,
either by the Bank or by the Government, to prepare for the loss
of these positive drivers?
Mr Barber: I think the record
of the MPC over the last 10 years has been a successful one and
the Bank and the MPC have certainly been conscious of these factors
that have played such a significant part in influencing our economy.
Globalisation has certainly contributed to lower prices in a whole
range of products in our economy and labour supply has made a
positive contribution. I think the migration that we have seen
on balance has contributed positively to our capacity to develop
our economy. Looking forward, both of these factors will continue
to play an important part in the shape of our economy.
Q349 Chairman: Has migration affected
the wage bargaining process?
Mr Barber: I think at the bottom
end of the labour market it has played a part. Having said that
I think migration has contributed positively to our economy, we
certainly have a concern that it has the potential to do damage.
It is important that we take stronger measures to protect migrant
workers from the exploitation that they can face from unscrupulous
employers, both in their own interests and in the interests of
ensuring that other workers do not see standards undercut.
Mr Lambert: It is some tribute
to the success of the MPC that the TUC and CBI in broad measure
agree on the big issues that surround it. On the lack of positive
drivers going forward and what should be done about changing macro
global conditions, it seems to me that monetary policy has an
important part to play in a stable economy but it is not enough
by itself. My answer to your question would be to address other
areas of policy than monetary policy, for example skills and the
need to upskill our workforce in this more competitive environment.
Q350 Chairman: In the Leitch review,
does that contribute towards that debate, do you think?
Mr Lambert: Yes, I think so, in
two ways: one, it provides a great deal of data to show the areas
of strength and more particularly the areas of weakness in our
skills set in this economy; and, two, it comes up with what I
think are some sensible policies.
Q351 Chairman: Does your report on
higher education have any links, do you think?
Mr Lambert: I think the process
which I describe in that report does have links. If you go round
our universities in the UK, you will see them playing a much more
dynamic role in the economy than they did 10 years ago at every
level. That is a very exciting part of what is going on here.
Q352 Mr Fallon: Mr McCafferty, Lord
George told us that because of global economic weaknesses when
he was in charge, we pushed consumer spending up to levels that
could not possibly be sustained in the medium and longer term.
In turn he says, and I quote, "That pushed up house prices
and increased household debt. That problem has been a legacy to
my successors; they have to sort it out ... ." Do you agree
Mr McCafferty: I think it was
clear that over the period of the early years of this decade consumer
spending growth was rather faster than would be expected in terms
of a long-term equilibrium rate of growth for that consumer spending
and was, to some extent, dependent on increasing debt as well
as growth in real, personal, disposable incomes. It has left a
legacy for some individual households of perhaps an uncomfortable
debt level, which would be very sensitive to further increases
in interest rates, and that clearly, as Lord George and the present
Governor have said, leads to a potential of individual social
tragedy. It is also clear, however, that the rate of debt in this
economy in the consumer sector is as yet insufficient to threaten
the systemic stability of the UK economy; it is simply not quite
large enough as a phenomenon and would require, on the Bank's
own calculations, interest rates to go much higher than any commentator
has so far suggested before it was to become a systemic risk for
the stability of the economy. However, I do think that it is clear
that consumer spending growth will have to slow in the coming
years, as economic conditions change.
Q353 Mr Fallon: Lord George is saying
that it is for the MPC to have to sort this out, or indeed perhaps
Mr McCafferty: I would not necessarily
agree with the phrase "sort it out". I do think that
the MPC needs to be mindful of consumer debt levels and other
conditions in the consumer market when setting inflation, but
unless that particular phenomenon becomes a systemic risk to the
stability of inflation, it is not really within the ambit of the
MPC to deal with the individual credit decisions of individual
Q354 Mr Fallon: But the MPC is running
monetary policy. Do you think it has given insufficient weight
to the new position of housing within the UK economy as above
other asset classes?
Mr McCafferty: No, I do not because
I do not think that it is possible, given the structure of the
MPC and the architecture with which it controls inflation, to
target individual asset prices explicitly, nor do I believe that
it is possible necessarily to consider how those individual asset
prices affect underlying inflation with any certainty or consistency.
I think from that point of view, to the extent that house price
inflation impinges on the stability of overall inflation, the
MPC needs to be mindful of that and take it into account but should
not target individual asset classes specifically.
Q355 Mr Fallon: Tim Page, do you
think the MPC is sufficiently aware of the risks of a rise in
house prices and increased household debt?
Mr Page: I would imagine the MPC
is sufficiently aware, yes. Obviously, the MPC needs to balance
a whole range of needs for the economy: the needs of industry,
the needs of house prices; the needs of a wide range. I would
fully expect the MPC to be aware of that.
Q356 Mr Fallon: Are you satisfied
they are doing enough to show awareness of that?
Mr Page: On the evidence that
I have seen, yes, I am.
Q357 Mr Gauke: May I ask about the
monetary policy framework. Mr Barber, the TUC's evidence to us
has stated that RPI remains the basis of most wage negotiations.
that, does the TUC think that it is right that CPI is the target
of the Bank of England for the MPC?
Mr Barber: We do not object to
the CPI being used as the measure for the inflation target for
the Bank but we make the observation, as you say, that in terms
of wage bargainers, I think RPI remains the index of which they
take closest account.
Q358 Mr Gauke: Where there is, if
you like, a divergence between the two, in some respects monetary
policy will not be designed to prevent large wage increases. Is
that fair comment?
Mr Barber: Monetary policy obviously
takes account of wage bargaining and is designed to influence
expectations of wage bargainers, but that is not the only factor
that drives the decisions the MPC makes month on month of course.
Q359 Mr Gauke: Mr Lambert, do you
think that CPI is the right target for the MPC?
Mr Lambert: I think two things:
one that it is very important that there should be consistency
of targets, so I think it would be a big mistake to chop and change
the targets from year to year. One change in 10 years is more
than enough because it is all about credibility in the end and
that would be undermined.
1 Ev 95-96; Ev 102-103 Back
Ev 95-96 Back