Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 408-419)


14 JUNE 2007

  Chairman: Chancellor, good morning to you and your colleagues and welcome to this session. Can you introduce everyone for the shorthand writer please?

  Mr Brown: Yes. Let me say first of all it is a pleasure to be part of this review that you are doing. With me are Nick Macpherson, the Permanent Secretary to the Treasury, Jon Cunliffe, the Second Permanent Secretary and Dave Ramsden, who is Head of the Macroeconomics and Fiscal Policy side of the Treasury. I have some opening remarks that I think might be helpful to the Committee.

  Q408  Chairman: Which you have informed us will be brief; is that correct, because time is short?

  Mr Brown: Yes. In the Mais Lecture in 1999 I set out how our macroeconomic framework, with Bank of England independence at its heart, was built around four economic propositions. Because there is no long term trade-off between inflation and unemployment demand management alone cannot deliver high and stable levels of employment. In an open economy rigid monetary rules that assume a fixed relationship between money and inflation do not produce reliable targets for policy. Therefore, thirdly, the discretion necessary for effective economic policy is possible only within a framework that commands market credibility and trust and that credibility depends upon clearly defined long term policy objectives, on maximum openness and transparency and clear and accountable divisions of responsibility. Before 1997 inflation was the British problem. Monetary policy decisions were made in a political process susceptible to short term pressures. There was no system of appointments governing who the Chancellor chose to advise him and there were no clear mechanisms of accountability. Since 1997, with interest rates set independently to meet the Government's stated symmetrical inflation target, UK inflation has now averaged around half that of the previous decade, inflation expectations have throughout remained firmly anchored to the Government's inflation target and the UK has as a result gone from having one of the highest inflation rates in the G7 to having one of the lowest, and in fact the most stable inflation performance. It is, however, important that monetary policy continue to evolve to maintain its status at the forefront of international best practice and this is the principle that has guided ongoing policy developments in our framework since 1997, including our decision for the introduction of CPI in 2003. I now propose changes to the process of monetary policy making. First, the timetable for replacing external monetary policy members will be pre-announced before the end of existing members' terms and that will establish a clear set of dates for each stage in the process, including by when the Government will have confirmed a new appointee. Secondly, as part of this timetable and to enhance the openness of the process, the Treasury will also invite by advertisement expression of interest from economists and experts in other relevant backgrounds interested in serving on the Monetary Policy Committee, and these will be invited before the end of existing members' terms and early in the timetable for appointment whenever a position is due to become available. Thirdly, in addition to the criteria already set out by the Bank of England Act 1998, which states, "The Chancellor shall only appoint a person under subsection (2)(c) if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Committee's functions". The Government will publish additional criteria on the qualities and skills set that it is seeking from successful candidates in terms of their expertise. In determining these criteria the Government will ensure that the composition of the Committee retains an appropriate balance of different skills and backgrounds. In terms of what will happen over the next three years, therefore, this enhanced appointments process will be used when Dr Andrew Sentance's current three-year term expires in May 2008, Professor David Blanchflower's term in May 1009, Professor Tim Besley's in August 2009 and Miss Kate Barker's current three-year term expires in May 2010. Neither the Federal Reserve nor the European Central Bank publish timetables for appointing members or invite expressions of interest from potential members, nor do they specify criteria for suitable candidates, so our system will now not only be more transparent than it has been in the past but more transparent and accountable than the other major systems in the world. We are already a world leader in our transparency and the success of this framework in delivering low and stable inflation is testament to the abilities of the various Committee members over the past decade, whom I thank for their work, the Governor and his predecessor as Governor, and the Government will continue to do everything that it can to support the Monetary Policy Committee in the forward-looking decisions it takes for the future. Thank you, Chairman.

  Q409  Chairman: Thanks very much, Chancellor. As you know, we have been reviewing the major aspects of the monetary policy framework and in the past month or so have visited both the Bank of Canada and the Federal Reserve. One interesting aspect is the possible need for any legislative changes in the monetary policy framework. The Governor of the Bank of England was before us and he did not see any need for legislative changes. Do you envisage that there could possibly be legislative changes as a result of your announcements?

  Mr Brown: What I am proposing today is an elaboration of the existing framework which is set down in legislation. Obviously, we shall look at any reports that your Committee brings to us about possible changes that you wish to recommend, but I do think we should bear in mind in all our examination of this that the test of this framework is its success. Over the last 10 years it has not only achieved a great deal of success but also, by the stability of the arrangements in which it operates, it adds to the credibility of our monetary policy framework and indeed our general economic policy, so I would be cautious, for example, about proposals such as I have seen where selection of members of the Committee is handed over, for example, to the Governor of the Bank of England. I think we have an appropriate balance between the members that are appointed through the Bank of England itself and members that are appointed externally, and I think some people are confusing the independence of the Bank of England with simply the position of the Bank of England itself in choosing its own members of the Monetary Policy Committee, and neither the Governor nor myself favour that particular set of proposals.

  Q410  Chairman: At the moment the MPC operates under a hierarchical mandate with inflation as the first target and, subject to that, to support the economic policy of the Government. The US uses a different system where the two are nominally equal. In our discussions in particular with Barney Frank, the Chairman of the House of Representatives Financial Services Committee, it seems the politicians on Capitol Hill are very keen on maintaining that dual mandate. Why do we not use such a system here?

  Mr Brown: The mandate that was written for the Federal Reserve was written many decades ago. The mandate that we wrote in 1997 was based on the experience particularly of the large inflation problems that we saw in the 1970s, 1980s and 1990s, and we argue, as I have done in the opening remarks I made to you, that there is no long term trade-off between inflation and unemployment and therefore man management on its own cannot deliver high and stable levels of employment. If you start from that proposition the terms in which the Bank of England operates make sense in the new economic understandings that we have both about how economies work and how we have to respond to inflation in the modern world. I would say that the objectives set for the Federal Reserve's constitution are a creature of their times and I would say that we have achieved more for employment in the last 10 years by the means by which we have, if you like, attacked inflation and therefore the fact that inflation is low and employment is high is testimony to the success both of our analysis and the framework. Remember: inflation has been half what it was in the previous 18 years and at the same time we have created two and a half million jobs, we have more people in work than ever before and unemployment itself has halved over that period.

  Q411  Chairman: The appointments process has been described to us as "opaque" by former members of the MPC and others and I think the statement you have made this morning has gone some way towards ensuring that that is not the case, but one of the statements you made in launching your campaign to be leader of the Labour Party was, "One of my first acts as Prime Minister will be to restore power to Parliament in order to build the trust of the British people in our democracy". Do you envisage any changes to the role of the Treasury Select Committee in the appointments process or elsewhere in the light of that statement?

  Mr Brown: No. I will be very interested to hear what the Treasury Select Committee says about these issues. The major change that we made when I became Chancellor was to remove from the power of the executive the making of the decisions about interest rates and I tried to set up a parliamentary accountability mechanism where the Governor of the Bank of England published an inflation report on which he was questioned by this Committee regularly, and at the same time the Governor of the Bank of England and any other appointees to the Monetary Policy Committee could come before this body. I am very happy to listen to what this body says about any future system of dealing with this matter. I do suggest to you that this is different from the traditional Nolan system of appointments. You are dealing with market sensitivities which are obvious when we are debating interest rate rises even at this moment and a signal that is sent before appointments are ratified about whether someone would do X or Y is a market sensitive issue and I would ask the Committee to bear that in mind in any recommendations it makes. However, generally speaking, where it is possible to do so, there should be more parliamentary accountability, not less, and the role of the Treasury Select Committee, where it is possible, should be enhanced and not diminished.

  Q412  Mr Fallon: Chancellor, it was the Governor who complained to us that these appointments were "left very much to the last minute", and today you have announced a timetable and more open advertisement. Why has it taken you 10 years to admit that you have been too secretive and rather badly organised?

  Mr Brown: I do not accept that analysis at all.

  Q413  Mr Fallon: You could have done this at any point in the last 10 years.

  Mr Brown: By its very nature, if I may point out to you, a decision that is not pre-announced is announced at the last minute. Neither the Federal Reserve nor the European Central Bank, nor the major central banks around the world, have a system either for publishing timetables for appointing members, which is implied in your question, nor do they invite expressions of interest from potential members, nor do they specify criteria for candidates, and that is what we are proposing to do today. I myself feel that we had to establish the current system and bed it down without major changes in its first few years because the whole point of what had happened previously was that governments had moved from one inflation target to another, one system of making inflation decisions to another. The confidence in monetary policy had been lost. It was important to establish a new system. We are moving today from the system that is operated by the European Central Bank and the Federal Reserve Bank and therefore introducing more transparency and more accountability. That is on the basis of experience but I would hesitate to think that the Committee should somehow condemn us for not doing this earlier. We are doing what no other major central bank does and we are doing it now, having learned from experience but still aware that any appointment is a market sensitive issue.

  Q414  Mr Fallon: But you have not quite explained why it has taken you 10 years to make this process more open.

  Mr Brown: We made changes to the inflation target in 2003.

  Mr Fallon: No; the appointments process I am asking about. Why has it taken 10 years to dawn on you that it should be more open?

  Q415  Mr Newmark: Because he is leaving.

  Mr Brown: I did not think that we should move from the system that was operated by other central banks, the ECB or the Federal Reserve, without having bedded down the present system in such a way that it commanded confidence and credibility. I believe the test of the system we have applied over the last 10 years is its success. I do not think you can argue as a committee that this system has not been successful. It has been successful. Having evaluated it over these last few years, I think we can now make these changes, but remember the changes we are making are not the practice of other central banks and we are moving further in accountability, as we have done before. I think it is the right decision to do so but I think it was also right to bed down the present system in a way that commanded confidence. Major changes in the system that were made quickly after 1997, as has been recommended by your party, would have been a mistake. To move to a new inflation target was the right decision, but that had to be bedded down as well. To move to this new system of appointments where there is greater publicity in advance of both the availability of people and at the same time people being given the chance to submit their names is a good thing, but I think the old system had to be bedded down first.

  Q416  Mr Fallon: You still nominate the two Deputy Governors at the Bank. Would you favour open advertisement for those two posts?

  Mr Brown: We can look at that, but I think it is pretty well known in the system when the positions of Deputy Governor are coming up, and in the legislation it is not as clear-cut as to what you are asking for in this position because basically you are asking for administrators in two different areas as well as people of economic expertise.

  Q417  Mr Fallon: So that will still be secretive?

  Mr Brown: I would not say it is secretive at all. It is based on us doing the right thing for the British economy in a market sensitive environment and I do think some of the proposals that are coming from other people fail to recognise that any decision about any appointment made to the Monetary Policy Committee is market sensitive and is likely to affect people's evaluation of the inflation expectations of the British economy or other aspects of the British economy, and I think this Committee will want to be very careful in its recommendations about what should change, knowing that that is the position.

  Q418  Angela Eagle: Talking about these other suggestions coming from other quarters, including the Shadow Chancellor recently saying that there should only be one term for the Governor of the Bank of England and various bits of tinkering around with appointments also being suggested, do you think there is anything in any of those suggestions or do you think that he is just playing fast and loose with economic stability?

  Mr Brown: No. In terms of the proposals that have come from other people, first of all that the inflation target is set annually by the House of Commons, I believe you should look very carefully at that proposal and question it because essentially to set the inflation target annually is a recipe for people to believe that Parliament may in certain circumstances simply change the target and cause a great deal of instability. I think you should be very careful about that proposal. The second proposal that the Governor should choose more of the members of the Monetary Policy Committee is, it seems to me, based on a complete misunderstanding of what independence means, and I hesitate to work out why that proposal was made. Of course, the Governor is the most important member of the Committee. He is the day-to-day Governor of the Bank itself as well as the Chairman of the Monetary Policy Committee, but the number of people chosen by the Governor is set down in the legislation. As far as the external members are concerned, it seems to me a matter of principle that these should not be chosen by the Governor; they should be chosen by reference to the democratic political system of our country, and it is a mistake to believe that independence is guaranteed if the Governor makes all the decisions about the appointments. That is a complete misunderstanding of what independence is all about, so I would caution the Committee against going along with the Opposition's proposal that suggests that the Governor should make most of the appointments and that there should be no role, in a sense, for the democratic system in making both recommendations and the appointments themselves. That is also a question in the context of market sensitivities.

  Q419  Angela Eagle: On the issue of appointment hearings there have been a few occasions when this Select Committee has expressed doubts about particular individuals who have been appointed anyway. Do you think there is any merit in this Committee having the power to prevent an appointment rather than just making a bit of a fuss about it and then it happens anyway?

  Mr Brown: I will obviously be interested in what you have to say about it. Again, the test of this system is whether it has worked. I know you expressed reservations about one appointee but in my view, and I think probably in the Committee's considered view, his period as a member of the Monetary Policy Committee was actually a successful one. I know you question people very precisely and in a great amount of detail, and I think that is a very good part of the political system, but again you have to ask yourself, given that we have to balance the different skills that are necessary for the Committee to operate successfully, whether to home in on one individual of one particular type and say that because that individual does not have a particular expertise he or she is not suitable for membership of the Committee may be a mistake, given that we are looking for a balance of skills at every point, a balance of market skills and academic skills, a balance of expertise in areas of macroeconomic policy, and I think that is always taken into account when we make appointments to the Committee.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 18 September 2007