Examination of Witnesses (Questions 140-159)
MR DAVE
RAMSDEN, MR
MIKE WILLIAMS,
MR EDWARD
TROUP, MS
SARAH MULLEN,
MR CHRIS
MARTIN AND
MR SIMON
GALLAGHER
18 MARCH 2008
Q140 Peter Viggers: The Chancellor
of the Exchequer led on the issue of resilience in his Budget
by making the proud statement, "This resilience puts the
UK in a strong position to deal with the current global economic
uncertainties," and yet the Institute of Fiscal Studies and
other commentators have said that the UK is in a less good position
to deal with shocks and strains than it was some years ago and
in a less good position than it was compared with other OECD countries.
How can they get it so wrong?
Mr Ramsden: I think it is a characteristic
of economists that they do not necessarily always agree on everything.
I think what I would say on our assessment of resilience is that
it builds on work that has been done by the OECD and that has
been done by the IMF on the performance of the UK economy. That
work looks at two sets of issues. What we are trying to do with
this resilience work is link up what has been going on at the
micro level in markets in the UK economy not just over the last
decade, but how markets at the micro level have performed in the
UK economy and then how is that supported at the macro level by
the policy framework. The conclusion of people like the IMF and
the OECD is that the combination of a long-term agenda on microeconomic
reform, starting with the labour market reforms that were instituted
in the 1980s and feeding right through to the present day, has
over time improved the working of the UK as a market economy.
At a macro level particularly the reforms instituted since 1997
where you have seen a monetary policy framework and a fiscal policy
framework which enables you to support and encourage stability
has led to this position where the UK has had very, very stable
outcomes in terms of a growth in inflation. The fact that we have
had 62 quarters of successive growth sounds like a sound bite,
but when you contrast that with Germany, which has had technical
recessions this decade, Italy, which has had technical recessions
this decade, and France that has seen quarters of falling output,
we have not seen any of that in the UK going back to 1992. We
think that that resilience is still there today.
Q141 Peter Viggers: I appreciate
your implied tribute to my colleague Ken Clarke in terms of the
timing. The work that has been done on resilience by the Treasury
is highly financially articulate but it does look backwards, whereas
if you look forwards, the things that we have been so successful
in and the things that have helped to move the British economy
forwards have been links with the United States, success in the
financial services industry and a property boom and those looking
forward do not look so good. Would you agree with that?
Mr Ramsden: No, I would not agree
with that. If you are trying to make a judgment about the future
you typically do focus on the track record of the recent past.
The UK's track record right up to the current time delivered growth
in employment of 300,000, that is 1% in the year to 2007 Q4 and
that is up to and after the period when the financial turbulence
started. When you look at the position on UK inflation where it
came back to target, as we were forecasting a year ago and as
some people queried, when you look at the stability in this budget
from fiscal policy, where fiscal policy has the flexibility to
support the economy, I think that that means that we can look
forward and think that the resilience that we have had will stand
us in good stead. The issues you draw attention to are also considerations.
Our links with the euro area in terms of trade are three times
greater than our links with the US. I do not think our economic
success has been tied to the US. I think our economic success
has been tied to being a flexible, open economy that is well placed
in the global economy.
Q142 Peter Viggers: You forecast
a rebalancing of the economy during the remainder of 2008 with
consumption and business investments slowing and external demand
receiving a boost from the depreciating pound. How sensitive is
this forecast to a further weakening of the world economy, in
particular the UK's key trading partners with the United States
and Europe?
Mr Ramsden: Our key trading partner
is very much the euro area which accounts for at least 50% of
our trade. If you look at the forecasts, really what is driving
this rebalancing is a quite significant slowdown in private consumption
growth. We also have a slowdown based on the latest data for business
investment. When I look at the path in the official data for business
investment, the fact that it barely grew in 2007 in Q4 on a year
earlier I find a little bit puzzling. It does not accord with
business surveys for business investment. I know that is an issue
that this Committee has been interested in in the past. We always
run off the official data and business investment is therefore
forecast to see relatively low growth in 2008 after two very strong
years. If the euro area were to slow significantly more than we
forecast then yes, there would likely be an impact, but as I have
said, I think there is an upside risk from the euro area forecast.
Q143 Mr Love: You have made a strong
case for the resilience of the British economy. What impact is
that likely to have on employment going forward? Will it be a
better impact than in the past slowdowns?
Mr Ramsden: Our judgments on the
labour market are very much framed by the recent performance which
has been strong. When I was analysing the labour market back in
the early 1990s one of the surprising things about labour market
performance then was how it did not follow the performance in
the 1980s. Unemployment started to fall relatively quickly from
its peak in the early Nineties. What do we expect to happen going
forward? The business surveys suggest a bit of softness compared
to the recent strength in employment. I think it is fair to say
that I would be surprised if we were still having the kind of
growth rates of 300,000 in employment that we saw a year earlier
in 2007 Q4, in 2008 Q4. In going through a period where we are
forecasting a slowdown in the UK economy you would not expect
from an economic perspective the sort of growth rates we have
seen in employment, which I think have surprised many people on
the upside, to be sustained. But what we do think is that the
resilience of the UK labour market means that you would not expect
anything more worrying in the UK labour market other than a slowdown
in employment growth.
Q144 Mr Love: Are you expecting a
reduction in inward migration going forward and what impact will
that have on wage pressures in the economy?
Mr Ramsden: As we briefed this
Committee on back at PBR 2006 when we revised up our trend growth
assumptions, those largely reflected an upwards revision to our
medium term projection for net inward migration to about 190,000
a year. Since we made that judgment and briefed you and others
on that the ONS has come out with their medium term migration
estimates which are actually slightly stronger in the medium term
than the ones on which our forecasts are based. That is our projection.
We do not produce a forecast for migration, but there are a number
of factors that actually will depend on economic factors, but
I have no reason to think that our projections post-PBR 2006,
which have served us well over the last year and a half, will
not continue. We would expect still strong inward migration of
around 190,000, which is a bit below the ONS projections.
Q145 Mr Love: You might have noticed
reports this morning that the CAB are having a massive increase
in enquiries in relation to mortgage difficulties. Are you expecting
house prices to crash as a result of recent market activity?
Mr Ramsden: Our forecast for house
prices at PBR time was that house price growth would slow down
quite a bit from the double digit rates we were seeing. If anything—and
we set this out in a chart in the supplementary tables that we
publish—we expect a little bit more of a fall in the house
price to earnings ratio. We are not forecasting a fall in house
prices, but we are expecting them to be a little bit weaker in
the short term than we thought they were going to be at PBR time.
Q146 Mr Love: As I understand it
the figures at the moment show house prices are falling everywhere
apart from Scotland and London.
Mr Ramsden: Scotland and London
are quite big places. House prices are rising about 2.25% on a
year earlier compared with double digit growth rates. The house
prices rising a little bit less than earnings means the house
price to earnings ratio falls a little bit. It fell a little bit
in 2005. We are certainly not forecasting anything more significant
in the housing market for the kind of reasons I went into in detail
at the PBR with you as to why we think the UK housing market is
different from the US housing market in terms of the structural
differences.
Q147 Mr Love: Let me just pursue
that for a second because yesterday some of our experts told us
that the United Kingdom was really the only housing market that
had major similarities to the US market. There is a healthy debate
going on about how similar they are. Why do you think that with
very similar housing markets we will not experience the same dramatic
fall that has happened in the US?
Mr Ramsden: I might as well put
it on the record again that I do not think they are very similar
to the US for three reasons. One, the UK has had this long-term
problem with housing supply. That is why the UK is just about
the only developed country over a 30-year history that has had
sustained real increases in house prices. When you bring that
up to the present time, we do not have the kind of supply overhang
that the US has, we have nothing like it. On the demand side,
we have increasing demand. We were talking about migration and
about increased numbers of households. When you look on the regulatory
side, I think we have a very different structure for regulating
mortgages and in a sense the lessons have been learned over the
years in the UK that the US is now learning. In the RICS European
housing review for 2008 they say "The UK housing market looks
much better placed than many others in Europe. Interest cuts are
likely to stabilise prices".
Q148 Mr Love: Let me ask you about
the link between house price inflation and consumption. Do you
think there is a direct link? If house prices do start to decline
will we see a more dramatic impact on consumption than perhaps
you are forecasting at the present time?
Mr Ramsden: We were conscious
that we had not done justice to this issue at the PBR and I think
you raised it in your report on the PBR and we tried to remedy
that by putting a box into the Budget document, box B7, which
sets out the range of issues around this potential link. I think
the conclusion I would draw is that in the past when there has
been an apparent link between house prices and consumption that
has been more the result of third factors such as a wider instability
or a wider weakness in the labour market. The wider instability
would mean high interest rates. I do not see those conditions
now. We have the conditions for stability in the UK economy and,
as I have said, I think we have a strong and resilient labour
market. Just as we conclude in box B7, we would recognise that
if in the UK there were to turn out to be a collateral effect,
so it was harder to borrow on the back of a lower evaluation of
housing assets, then there may be some impact there, but we are
factoring in quite a significant slowdown in consumption already.
I think we have made a realistic assessment of that issue.
Q149 Mr Love: Let me add two things,
one of which you have already talked about, which is the continuing
impact of the credit crunch on the provision of mortgages and
the cost of debt, but also the personal debt problem that we have
in this country which is very significant for quite a large percentage
of the population. If we assume that the credit crunch will last
rather longer than I suspect the Treasury is assuming the consequences
of that could be quite serious for consumption and therefore quite
serious for the economy.
Mr Ramsden: The balance sheet
is pretty clear on this at the macro level. The net assets in
the UK for the household sector are £7 trillion. There is
£1 trillion of debt but there is £8 trillion of assets,
£4 trillion of non-financial, mainly housing, and £4
trillion of financial. We recognise that there are particular
issues for particular groups and the Government has policies to
try and address those. As to this being a widespread issue across
the whole economy, no, we do not think that this is a significant
risk.
Q150 Mr Fallon: Let us turn now to
the public finances and perhaps give you a rest, Mr Ramsden, and
bring in Sarah Mullen on public spending. This is the seventh
time you have postponed the year in which the current budget will
be in surplus. In Budget 2003 you said we would be in surplus
in 2005. We are now told you will not be in surplus until 2010-11,
five years later. Is this sloppy Treasury forecasting or is it
incompetent political budget making?
Mr Ramsden: I am afraid I am going
to have to start answering those questions, if that is okay and
my colleagues may want to come in and support me. We have been
quite open with you about the challenges that we have had in forecasting
the public finances in recent years after a run of years where
we were over-pessimistic about the public finances. In the early
years of this decade we have been over-optimistic. As I explained
to you at PBR, we managed to break that trend in 2006, at least
in the year ahead forecast where with the year ahead forecast
in 2006 for the current deficit of about £7.5 billion actually
the outturn was more like £4.5 billion.
Q151 Mr Fallon: I asked you when
we were going to get into surplus. It would help the Committee
if you gave us some answers. You have been wrong seven times in
a row now. Why should we believe this new forecast that you will
not be in surplus until 2010-11 if you have been wrong every year
since 2003?
Mr Ramsden: Compared with the
forecasts that I was discussing with you at the time of the PBR
for 2007-08 both on the net borrowing measure and on the current
balance, our latest estimates are below the forecasts which we
discussed with you at PBR. This is not one-way traffic in terms
of how we produce the forecasts.
Q152 Mr Fallon: Are you telling me
you have not postponed it by a year?
Mr Ramsden: No.
Q153 Mr Fallon: The Red Book says
you have postponed the Budget surplus year from 2009-10 to 2010-11.
Why are you denying that?
Mr Ramsden: I am not denying that,
I am trying to put that in context. Since Budget 2007 and since
the PBR, as we have been discussing, the credit shock that has
hit the global economy and the UK economy has intensified. We
are in a position where we can allow the public finances to be
flexible to support the economy. That explains why we have significant
increases in borrowing over the early years of the forecast period
and why the year in which we go back into surplus goes back a
year. As the Chancellor said in his Budget speech, that is the
right thing to do in these circumstances.
Q154 Mr Fallon: The credit crunch
did not start in 2003. This forecast has gone back every single
year for the last five years. Why has it always been forecast
the wrong way and why should we believe the new forecast?
Mr Ramsden: I am trying to explain
the factors that underlie the new forecast to you and our judgments.
If you go back to 2005, we had a problem that emerged with MTIC
fraud and VAT. We made mistakes, as we have admitted to you, in
terms of how we forecasted the North Sea oil revenues. Now we
are being hit by this credit shock. These impact on our forecasts,
but we try and set out to you as transparently as we can the assumptions
underlying these forecasts. I think these fiscal forecasts are
very realistic.
Q155 Mr Fallon: Could you just confirm
the figures? In Budget 2003 you said in the year that is just
ending in a couple of weeks' time we would have a surplus of £9
billion. In the Budget this year you told us that would be a deficit
of £7.9 billion. That is right, is it not?
Mr Ramsden: I am afraid I have
only got the Budget 2008 document in front of me so I cannot confirm
earlier years, but I will happily talk about what has happened
and the fact that we have higher borrowing in Budget 2008.
Q156 Mr Fallon: I just want to be
clear about the figures. Five years ago you said this year we
would be in surplus by £9 billion. In fact, the outturn is
minus £7.9 billion. That is a swing round, a deterioration
of £17 billion. That is about half the defence budget that
you got wrong, is it not?
Mr Ramsden: I have no reason to
doubt your numbers. I have tried to explain to you the things
that have happened in the economy which have impacted on the public
finances over that period.
Q157 Mr Brady: Can I turn to the
question of capital programmes and look at what the Government's
plans are to change or adjust capital programmes in the light
of current economic circumstances.
Mr Ramsden: The position on capital
is that for 2007-08 we are forecasting that public sector net
investment will be well on track to be 2.25% of GDP, which is
three times up on the ratio of public sector net investment to
GDP at the start of this cycle back in the 1990s. What we have
seen are sustained increases in public sector net investment.
One of the purposes of the fiscal framework has been by setting
a Golden Rule you focus on current borrowing. It enables you,
as long as you do not threaten sustainability, to protect capital
investment and that is what we have seen over this period. If
you look at the 2007-08 number, it is a little bit down on what
we were previously forecasting, a little bit over £1 billion.
Q158 Mr Brady: Why is it down?
Mr Ramsden: Because we have new
data and we have new estimates. There is an AME capital margin
that has not been used up. It has gone up in previous years. If
you look over the last five years, public sector net investment
overall is a little bit higher in nominal terms than we were thinking
it was going to be at PBR time.
Q159 Mr Brady: So it is still policy
to increase the level of policy expenditure in capital programmes?
Mr Ramsden: Absolutely, up to
2.25% of GDP and that is set out clearly both in the CSR figuring
and then also in the figuring for the later two years of the forecast
period.
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