Select Committee on Treasury Minutes of Evidence

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 perspective.

  Q348  Chairman: May I start in terms of the written submissions you have both presented? [1]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 with him?

  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 the Government.

  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 consumers.

  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. [2]Given 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

2   Ev 95-96 Back

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