Examination of Witnesses (Questions 408-419)
RT HON
GORDON BROWN
MP, MR NICK
MACPHERSON AND
MR JOHN
RAMSDEN
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.
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