Examination of Witnesses (Questions 420-439)|
MP, MR NICK
14 JUNE 2007
Q420 Mr Todd: Chancellor, could you
expand on what you mean by "the balance of skills"?
What sorts of skills are you thinking about, because you will
be seeking to publish these criteria following the announcement
that you made at the start of this hearing.
Mr Brown: That is the essence
of the debate that we can now have. The Act says "knowledge
or experience relevant". Funnily enough, the European Central
Bankand maybe you would expect thissays it is not
just that but relevant standing in their field, so I think we
have to look at both the experience that people can bring to bear
and at the expertise they have. As I said, there are two points
that I would bear in mind in setting out the criteria for the
future, that we have to get the balance right between, if you
like, market skills and academic skills, and that is what I have
always tried to take into account. For example, when it was controversial
that we appointed a business leader to the Committee, in the context
of a large committee to have someone who had that experience was
the right thing in my view to do. Equally, I think we need a balance
between the macroeconomic skills and general skills related to
the economy, so again I think it was controversial for the Committee
that we appointed people who have expertise in employment as opposed
to macroeconomic expertise, but, again, getting the balance right
between Mr Nickell and Professor Blanchflower, for example, who
had long term projects related to employment in the economy, and
those who had more specific skills in relation to the macro economy
was a very important part of what we did as well. These would
be the two essential criteria, but we will obviously publish a
paper on this and we will elaborate on what is in the Act, "knowledge
or experience relevant".
Q421 Mr Todd: Would that also include
the technical aspects, because one of the tasks that the MPC has
is to work with a model that the Bank of England operates to provide
forecasts for our economy, and having at least one member of the
MPC who has a strong technical knowledge of the model might appear
to be an advantage. Would you share that view?
Mr Brown: That could be said to
be the case. On the other hand, all members of the Committee have
access to the very considerable expertise of the Bank of England's
own staff. Some of them are engaged in their own research projects
and that is part of the work in the Bank of England. They are
perfectly able to draw on the experience and expertise that exists
outside the Bank to inform their research or their thinking, and
I do not think at the moment in British economic policy, or even
in the Bank itself, that there is a shortage of expertise available
to the Committee itself if they want to either look in detail
at the models of economic behaviour or any other aspect of economic
policy. I think we are learning quite a lot and this suggests
to me that the debate ought not just to be narrowly focused in
the future of the MPC on membership. I think we have learned a
lot over the last 10 years about how we manage inflation, and
I think the behavioural changes that are taking place in the British
economy as a result of the new system are something that this
Committee might want to look at at some point as well. I think
in particular that if we had started in 1997 with our inflation
target first of all nobody could have predicted, as did happen,
that inflation expectations would come very much in line with
the inflation target. Before 1997 you had a 2.5% inflation target
but you had a 4% inflation expectation. Very quickly these inflation
expectations and the inflation target aligned themselves and I
think that was a great success of the new system, so it did command
confidence. The second thing to say is that you might not have
expected that wages or earnings would have come in line in the
way they did, in other words that people would have acted as if
you did not have the inflation target rather than that if you
did, and I think what happened quite early on, and it may be good
fortune but it did happen, is that wage expectations also moved
in line with the inflation target and, while we had great difficulties
over average earnings figures for a while because they were factually
wrong, that is a big change that has happened over these last
Chairman: Chancellor, we are conscious
of the time. We know you want to get away and we understand that
but we have a lot of questions and we are looking for your wisdom.
Q422 Mr Breed: One of the consequences
of the lower interest rates has been the rise in household debt.
It has been described to us as not of importance in terms of monetary
policy but very important in terms of a social issue. Do you think
enough is being done between the Treasury and the Bank to address
these social issues, like household debt?
Mr Brown: There are two issues
here. One is a group of people who themselves get into real difficulty
as a result of either over-extending themselves or something happening
to their employment position or their family income, and I think
we are putting in place measures that give proper advice, proper
help, proper debt counselling, proper support, and obviously,
we want the banks and the mortgage companies to be sensitive to
people in the position that they find themselves in. That is one
aspect of it. The second aspect is the general economy and how
it is moving forward, and I would suggest to you that if you look
at the level of debt as a percentage of overall income, the level
of people's borrowings as mortgage holders and what they have
to pay back as a percentage of their income, we are not in as
bad a position as you are implying by your question. In other
words, in an economy where you have relatively low inflation people
are able to pay back their debts generally. The wider issue about
affordability in housing is something that we might deal with
separately and I have already said that I think that is a priority
for our country.
Q423 Peter Viggers: How much weight
do you think the Monetary Policy Committee should be placing upon
monetary aggregates when assessing future inflation?
Mr Brown: I am rather pleased
that I set out the four points in my Mais Lecture right at the
beginning, and this is what has guided our economic policy since
1997. I said then in that lecture, and I will be very happy to
give the detail of what I said to the Committee, that rigid monetary
rules that assume a fixed relationship between money and inflation
do not produce reliable targets for policy. I know that in the
European Central Bank there are the two pillars of policy that
include the examination of monetary aggregates, but our experience
of the eighties was that in an open economy, far more open, far
more global in its capital markets than ever before, this assumption
that you had a fixed relationship between money and inflation
and that you could therefore set quite rigid and fixed monetary
rules was found not to be workable.
Q424 Peter Viggers: I think the consensus
view is that the creation of the Monetary Policy Committee, where
you appointed experts and then exercised reticence, has indeed
been a great success and it contrasts starkly with the interventionist
micromanagement in the disaster areas like pensions and means
testing and tax credits. Do you think there is a wider lesson
here for the Government?
Mr Brown: I disagree with you
fundamentally. There are millions of people who are better off
as a result of tax credits. I think you forget, despite what happened
to the Stock Exchange and the loss of Stock Exchange value for
pension funds, that the value of the pension funds in this country
over these last 10 years has risen from £500 billion to a
trillion, in other words has doubled. I think you forget that
in the question that you are putting forward. As far as general
wealth in this country is concerned, as a result of all the changes
we have brought about the 60% increase in the personal wealth
of this country is a reflection of the fact that, while you say
these things have not worked, in actual fact people are in a better
position now than they were 10 years ago. I am grateful to you
for acknowledging the success of monetary policy but I would ask
you to look at the growth rate of the economy as a whole, the
growth in employment in our economy, the growth in living standards
in our economy and the growth in personal wealth.
Q425 Mr Simon: I was at Hay a couple
of weekends ago listening to you talk about how the political
class needs to find completely radically new ways of involving
and engaging an alienated populace. How does that transfer to
this, where you have interest rates set by a committee of experts
for a generation of consumers under Labour that have never heard
Mr Brown: I think it transfers
into saying this. In 1997 we took perhaps the boldest decision
in monetary policy that had been taken in a century where, after
20 years of the failure of governments effectively to deal with
inflation, we set up a new system and we gave up power. The executive
was prepared to surrender power over interest rate decisions in
the interests of having a better system and in the interests of
making sure that the system itself was credible to deal with the
inflation problem that we had inherited, and I think that model
does have application to other areas of policy and perhaps this
is not the right time or place to detail that. The Chairman would
rule me out of order if I did so.
Q426 Chairman: Absolutely.
Mr Brown: The idea that an executive
in the modern world is prepared to surrender its power in the
interests of better decision making is, I think, the fundamental
principle here, and I think the relationship between the executive
and legislature and the executive and the people of our country
is something that is subject to both criticism and the potential
for reform in a whole series of different areas similar to what
we have managed to do with the Bank of England.
Q427 Mr Newmark: Sally is going to
talk about RPI versus CPI but I just want to focus on CPI, Chancellor.
It would be helpful if you could explain why the average CPI inflation
rate is higher in the UK now than in the rest of the EU, why it
is twice as high as it was in 1997, and why you have now missed
your target for over a year. Who is to blame? You or the MPC?
Mr Brown: As you know, there are
three forces governing inflation around the world. The first is
manufactured import prices; that is effectively the China and
India effect. The second is oil and commodity prices, which I
think you are mistaken in believing hit every economy in exactly
the same way. They hit economies in quite different ways. Why
we have been hit by oil prices later than America is simply because
the second round effects on utility prices have been what have
been most prominent in our inflation figures, and the third is
service sector costs. America moved to inflation of 4.4%. It was
at 4.3% or 4.4%, I stand corrected; it may be 4.3%, but America
Q428 Mr Newmark: I am talking about
the UK versus the EU, Chancellor, not America.
Mr Brown: Exactly, but America
was 4.3%. If I am right, the European peak was 3.3% and our peak
was 3.1%, so our peak has been a lower peak than the European
Q429 Mr Newmark: Chancellor, do not
play semantics with me. We are now 2.8% in the UK versus 2.2%
in the EU. In 1997 it was 1.6% inflation. We are now at 2.5% inflation.
Why is that the case? You put great stock in achieving your targets.
You have failed.
Mr Brown: And you are completely
wrong again in your analysis.
Q430 Mr Newmark: It is not my analysis.
These are the facts.
Mr Brown: It is the peak of inflation
that you should be looking at and, as I keep explaining to you
and you do not want to understand,
Q431 Mr Newmark: I do understand.
You want to hear something different.
Mr Brown: the reason that
the oil effect in the United Kingdom is quite different from the
oil effect in other countries is that it is the second round effect,
the utility price effect, that has had the biggest impact on our
inflation. Our inflation was a lot lower last year than in other
countries. It has been higher but only to the point of 3.1%. It
is now down to 2.5%, and I just repeat for your information that
the peak of inflation in the USA was 4.3% and the peak of inflation,
as I understand it, in Europe was above the 3.1% figure that we
have had and we are now down to 2.5% in the latest CPI figures,
so I think my case is made by the information I am giving you.
Mr Newmark: I do not think it is but
I will pass on to Sally.
Q432 Ms Keeble: You said just now,
Chancellor, that you wanted a new deal. You thought that you should
deal separately with the issue of house prices and the pressures
which that puts on people, but I wonder if you would say whether
you think there is any merit in including in the calculation of
inflation something to reflect house prices, given that the increase
in interest rates is putting increased pressure on this and this
is indeed the biggest single factor in household incomes. If you
are not going to look at CPI and changing that slightly, how else
will you deal with the housing price issues that you referred
Mr Brown: I think housing is a
big issue that is about demand and supply. It is about the rising
demand, through the changing composition of households, for new
housing and particularly for smaller new housing, and it is about
supply, and that includes the issues of planning and the issues
of the construction industry itself and its ability to deliver
the house building numbers that are needed. At the moment we are
not supplying enough houses to meet the demand and that is one
of the reasons why house prices are high but it is also one of
the reasons, obviously, why a lot of young people find that the
houses they want are not affordable. The second thing which is
an issue is the form of the mortgage market at the moment, and
remember the Miles review looked at that, and there are certain
things that I believe we can do about that and one of them is
shared equity, but there are other things that we can look at.
I would say the third thing is the lack of supply of rented as
well as houses to buy, which is an issue in the housing market
Q433 Ms Keeble: Can I come back on
that because I appreciate all the stability that the MPC has brought
but the one lever it has is to put up interest rates which feeds
through into mortgages and it is not about people coming into
the housing market; it is about people whoand I am thinking
about most of my constituentsput their household incomes
together very carefully and plan out their spend and a small increase
in the interest rate feeding through to their mortgage can be
very destabilising and then all it needs is somebody to lose a
little bit of overtime or whatever, so what would you do about
the issue of interest rate rises and the impact on people's household
Mr Brown: Interest rate rises
are a matter for the Bank of England, so what would I do about
them? I would retain the power of the Bank of England to make
the decisions about interest rates.
Q434 Ms Keeble: What about CPI?
Mr Brown: CPI is the internationally
accepted measure of inflation and I believe it is right to continue
to work through the CPI. There are international analyses now
being done about what should and what should not be included in
the CPI, but I think it would be better for us to follow the general
trend of what is happening in other countries. It is in our view
a superior measure and there is the ONS paper The New Inflation
Target: the Statistical Perspective, if you would like to
look at it. Housing demand and supply, however, are a wider question
and the Committee may wish to come back to that at some point.
Q435 Mr Love: Can I turn to the recent
experience on letter writing? It has been put to us that it should
not be regarded as a sanction. How do you regard the recent experience
of letter writing?
Mr Brown: Rare. I have had two
letters: the previous Governor of the Bank of England writing
to me to say he was pleased he had not had to write a letter and
the new Governor writing the one letter that I think to some extent
demonstrated the credibility of the system because people accepted
that this was a proper way of dealing with a problem, and one
of the problems obviously had been the very big rise in oil and
commodity prices that we are dealing with, but he also looked
at what was specific to the United Kingdom economy and I think
the experience of the exchange of letters was a good one.
Q436 Mr Love: In the evidence to
us the most interesting feature has been a focus on the letter
that you write back to the Governor rather than the Governor's
letter to you and it was suggested to us whether or not you as
Chancellor would consider writing a letter suggesting to the Governor
that he may be bringing inflation back to target rather faster
than you would like in terms of the overall impact on the economy.
Would you consider writing such a letter?
Mr Brown: It has obviously got
to be at the discretion of any Chancellor to take a different
view from the Governor about the overall effect on the economy,
but fortunately over these last few years we have generally been
in agreement and a lot of the arguments have been arguments held
with the votes that are taking place in the Monetary Policy Committee.
I think you underestimate the extent to which these are heated
debates that are taking place themselves, sometimes in the Monetary
Policy Committee where there have been very tight votes on certain
occasions, and the tradition of voting, including members of the
Governor's staff not voting with the Governor, has been pretty
well established over these years. Again, I come back to the results
of the process. We have been successful. The average UK inflation
rate since 1997 is 1.5%. In France it is 1.61%, in Italy it is
2.32%, in Germany 1.5%, the same, but, of course, Germany has
had to suffer four million unemployment while it is trying to
keep inflation low. Generally speaking our record has been superior
to Europe and I believe that that is something we should be proud
Q437 Mr Mudie: Chancellor, why are
you so adamant against the dual mandate?
Mr Brown: When you say "the
dual mandate", do you mean in relation to inflation and employment?
Q438 Mr Mudie: Yes.
Mr Brown: We take into account
employment in the decisions. That is clear.
Q439 Chairman: I know you do. Why
are you so adamant against it?
Mr Brown: Because I think the
old system was built on the idea that you were trading off inflation
and employment and that at some point you should make the decision
to go for employment against inflation, and there may be other
points where it is inflation against employment. The new understanding
is that there is that there is no long term trade-off between
inflation and unemployment. If you cannot get inflation low you
are in the end probably going to have high unemployment and if
you cannot keep a stable economy it is not good for either growth
or employment, so that is the new understanding of how modern