June 2010 Budget - Treasury Contents


Examination of Witnesses (Questions 1-89)

SIR ALAN BUDD, MR GEOFFREY DICKS AND MR GRAHAM PARKER

13 JULY 2010

  Q1 Chair: Sir Alan, welcome to this the first hearing of the Treasury Select Committee, and the first Treasury Select Committee ever to be elected. It is a particular welcome because we have before us a new institution. You have very kindly agreed to give us two lots of evidence, and we are looking forward to seeing you next week to discuss the structure of the OBR and its statutory basis, and your thoughts on that. Today we are going to concentrate on the forecast. I gather that you have some opening remarks you would like to put on to the record. I have to say, on the whole, the Committee rather deprecates opening remarks, except where they are essential, on market sensitive grounds. I do not think this fits that bill, but in this case, having come briefly and now going quickly, I think we should allow you these opening remarks.

Sir Alan Budd: That is extremely good of you, Chairman, and I do appreciate your indulgence in this regard. May I introduce Geoffrey Dicks, on my right, and Graham Parker, on my left. It is a great honour to have been invited to appear before you. As you have said, we are your first victims, so that is a particular privilege, and we hope the fact that you are seeing us first symbolises the importance that you attach to the OBR and its work. We were pleased by the domestic and international response to the establishment of the OBR and welcome this opportunity to give evidence about it. We are proud of the fact that starting from scratch and with the essential help of the Treasury, HMRC and the Department for Work and Pensions, we did produce in a matter of weeks a fully documented pre-Budget forecast and then a Budget forecast. Apart from the remarkable fact that the Chancellor bound himself to accept our forecasts without any interference, there was also a significant move to greater transparency. The forecasts contained more detail than had ever been the case before, including forecasts of wages and salaries, profits, average earnings, ILO unemployment and ILO employment, and a number of variables specifically related to the public finances. That was certainly a first, and we hope you will welcome that as an aid to scrutiny of the forecasts, particularly by this Committee. We have also sent you, Chairman, our terms of reference—the terms agreed with the Chancellor—in the hope that this will provide a guide to the areas on which we are able to comment. We have also, as you know, published our advice to the Chancellor on the permanent OBR, though I assume, as you say, that you will want to leave detailed discussion of that to a later meeting. As we say in our covering letter, we have not been prescriptive on all the questions since we do not want to pre-empt your Committee's views on them. More importantly, perhaps, you have also received a note on the forecasts of general government employment, and I am sorry that it has only just reached the Committee. We are publishing it on our website at 9.30. I realise it will take time for the Committee to absorb but, in brief, it suggests that modelling changes between the pre-Budget and Budget forecasts raised the forecast of general government employment by about 140,000 (these were modelling changes) and an approximate—and it must be approximate—measure of the net effect of the Budget measures on general government employment was to reduce it by 160,000. In the course of the forecasting round, as we explain in the note, there was a change in the way that average employment costs for general government employees were predicted. Given the forecasts for total general government pay costs within departmental expenditure limits, the consequences for the path of employment followed automatically. As we promised in our pre-Budget forecast, we have, as far as possible, met requests for further background information. That was why we published our forecasts of general government employment, in response to a request. We did not publish it as part of our initial forecasts because, despite its obvious interest, it is not a key determinant of our economic and fiscal forecasts. The decision to bring forward publication by one day was completely ours. We did it because a Treasury document with misleading numbers had been leaked and was giving rise to misinformed comment. Given our concern with transparency, we thought it correct to release the numbers which correctly represented the OBR's forecasts. The numbers we released on 30 June were not an appropriate basis for attempting to estimate the effects of the June Budget on general government employment; they simply showed the forecasts. The release pointed out that there were modelling changes which affected the Budget numbers. In retrospect, I wish that we had provided more information and a specific warning against using the numbers to estimate Budget effects. There was no conspiracy or pressure on us to change the numbers and no pressure on us to bring forward publication. That is all I want to say, at this stage. Perhaps I could conclude by saying that we shall practise a division of labour in which Geoffrey Dicks will mainly answer questions about the economy forecasts and Graham Parker will mainly answer questions about the fiscal forecasts. Thank you very much.

  Q2  Chair: Thank you, Sir Alan. Could you answer a few questions straightaway on these employment numbers? When you decided to put out a corrective statement (the statement that came out on 30 June), how did you come to take that decision? Did you take it personally? Did you take it on the basis of advice?

  Sir Alan Budd: Yes. We published the numbers that were due to be published the following day. We published them in the form in which they would have been published on the following day.

  Q3  Chair: So they were already fully prepared?

  Sir Alan Budd: Yes, and a whole lot of other numbers, the publication of those, was also brought forward by a day. So there was a pack of numbers due to be released on the Thursday and we released them on the Wednesday. The question of whether or not to bring forward the publication was discussed with my colleagues, and we agreed that this was the correct thing to do. It was our decision, and taken for the reasons that I have given.

  Q4  Chair: Why did you release them at five-to-twelve on Wednesday?

  Sir Alan Budd: I believe that they were released at 11am. That is the information that I have—that they were released at 11 o'clock.

  Q5  Chair: You are putting out material today at 9.30 am.

  Sir Alan Budd: Yes.

  Q6  Chair: Which seems a reasonable and sensible time for material already prepared. Why did you pick on 11 for these OBR figures? Incidentally, those who keep an eye on these things said they were first available on your website at five-to-twelve.

  Sir Alan Budd: I am sorry if that is true. That must be checked. We have not yet quite decided our full procedures for releasing numbers or the time at which it should occur. This is a matter still for discussion, though I think frequently the time of 11 am will be chosen, but that is a matter of policy. The reason they were not released until 11 is as follows: I normally arrive in the office very early in the morning, and sometimes have to ring the bell on the front of the building in order to be allowed in. However, on that particular morning, for personal reasons, I was unable to reach the office until about half-past 10 in the morning. Since the decision could not be taken until I arrived, that was why the decision was taken at that moment, and then the numbers was released as soon after that as could be reasonably done. Again, there was nothing sinister about the time; it was probably the only time while I have been working for the OBR that I was not there very early in the morning.

  Q7  Chair: Did you think there would be a huge fracas about the fact this was being released minutes—perhaps 60, perhaps five—before Prime Minister's Questions?

  Sir Alan Budd: I did not notice and did not realise. I was, of course, quite taken aback by the response that our action received. It is always difficult to remember what one remembered or knew at a time. In taking our decision it was not at all part of my decision—or our decision—that there was Prime Ministers' Questions that day.

  Q8  Chair: Was there any contact between your Office and the Prime Minister's Office with respect to these numbers prior to their publication?

  Sir Alan Budd: As far as the Prime Minister's Office is concerned, I am not sure. We do have the practice, rather like the ONS, of releasing within the Treasury numbers that are going to be put out by us, so that they have prior warning of that. Those numbers had been circulated in the Treasury—I believe they were circulated—on the previous Friday.

  Q9  Chair: So the Government had these figures from the previous Friday but they were made available to the press sometime between 11 and 12 on Wednesday?

  Sir Alan Budd: Yes, yes.

  Q10  Chair: I am sure you can understand the sensitivity now, retrospectively, of the decision you took, and I am sure you understand that this has led many to query the independence of the OBR.

  Sir Alan Budd: Yes, of course, that consequence I most sincerely regret, and I have spent a great deal of the time subsequently trying to work out whether this was a mistake. One makes mistakes all the time. I still believe that it was the correct thing to do to release those numbers in response to the leaked document.

  Q11  Chair: If these documents had already been prepared and are ready to go, why was it not until 1.50 that they were deposited, as you are normally required to do, with the House of Commons Library?

  Sir Alan Budd: It is difficult for me to answer that precise question, Chairman, but, again, I think we would have followed the normal procedures. If there was some delay I would have to investigate why that was the case.

  Q12  Chair: So that was an exceptional circumstance for which you have no explanation. Have you looked carefully into the timing of the publication of these documents?

  Sir Alan Budd: I thought I had satisfied myself that they were published at 11 am. So I am surprised by the comment that you have made.

  Q13  Chair: That they did not arrive there until 1.50?

  Sir Alan Budd: The question I have not specifically answered when they were deposited in the House of Commons Library, and I honestly do not know the answer to that question.

  Q14  Chair: You do understand, though, Sir Alan, do you not, that this has done quite a bit of damage to the early reputation of the OBR?

  Sir Alan Budd: And, as I have said, I regret that enormously, Chairman.

  Q15  Mr Umunna: Just a follow-up, actually. When did you first become aware of The Guardian article where these leaked Treasury figures appeared?

  Sir Alan Budd: I think I can tell you almost precisely: at 9am on that morning.

  Q16  Mr Umunna: Just for the record, did anyone connected to the office of the Chancellor and/or the Prime Minister suggest, in light of that leak, that it might be wise to put forward and publish the OBR employment forecasts?

  Sir Alan Budd: Not as far as I am concerned, and they certainly did not make that suggestion to me.

  Q17  Mr Umunna: So the decision to release your forecasts that day was a unilateral one, made by you alone?

  Sir Alan Budd: By the three of us, yes.

  Q18  Mr Umunna: By the three of you. Did you not think that it might be wise, given that you knew that your forecasts were going to be circulated within the Treasury, to, perhaps, as a courtesy, notify the Opposition Treasury team and/or the Leader of the Opposition's office, given there was going to be Prime Minister's Questions later that day?

  Sir Alan Budd: I am not sure that that would be the normal practice with any release. What was important to us is that they would be released to everybody at the same time, and I had assumed that that was 11 am on that day.

  Q19  Mr Umunna: Would you say that simply posting something on a website without really giving proper notice to the media and other interested parties counts as a proper release of information?

  Sir Alan Budd: I think we have a process, which we are still developing, for release, and I think the normal process would be that we would release it at a pre-announced time—normally, it is a pre-announced time—on our website.

  Q20  Mr Umunna: Was it released by people within your secretariat, or was it released by people in the Treasury?

  Sir Alan Budd: It was released by people within my secretariat. We are responsible for the content of our website.

  Q21  Michael Fallon: Just to clear this up, in relation to your reference to "pressure", no Minister asked you to accelerate the publication of this material?

  Sir Alan Budd: No.

  Q22  Michael Fallon: Could you also just clear up the question of your own departure? When did the Chancellor first know that you were going to leave?

  Sir Alan Budd: Yes. It is hard for me to know what the Chancellor knew when, but it has always been completely clear—I made it completely clear—to the Chancellor that I had only taken on this job for the emergency Budget and for any work associated with it, including of course appearing before this Committee. The Chancellor knew that I had a three-month contract as did my colleagues, and the only matter that was not known was precisely when I would leave the job, and that was not known because it had not been decided. I have now agreed with the Permanent Secretary to the Treasury that I shall leave the job when my contract ends on 13 August.

  Q23  Michael Fallon: The Chancellor always knew it was a three-month contract?

  Sir Alan Budd: Yes.

  Q24  Michael Fallon: Can we turn to your growth forecasts on page 80 of the Budget? Why is the OBR so confident that we can or will avoid a double-dip recession?

  Sir Alan Budd: Can I, at this stage, use my—

  Q25  Michael Fallon: May I have your answer first?

  Sir Alan Budd: Okay. You have used the expression "so confident". No forecaster is ever so confident about anything, and that is why we have provided the fan charts to illustrate the uncertainty about our central forecasts. As we say, for example, if we look at the forecast for next year, there is only a 40% chance that the outcome will lie 1% either side of our central forecast. So this is a matter of extreme uncertainty, and the possibilities certainly include a double-dip recession. They also include a stronger recovery. So we have done our best to provide our central forecast, given the information and judgments that have been made, but we are not more confident than the fan charts suggest we should be.

  Q26  Michael Fallon: Let me ask Geoffrey Dicks then: has anything happened since the Budget that would make you revisit that forecast?

  Mr Dicks: I would not have said so. Most of the numbers that are coming out have been in line with the numbers we were looking for. The point we were really trying to emphasise is that all of forecasting is extremely uncertain. These are innovations, these fan charts that we have for GDP and public sector net borrowing. As Sir Alan has said, the range of uncertainty, as you can see from that chart on page 80, is really quite large.

  Q27  Michael Fallon: In your view, does the Budget make the possibility of a double-dip recession more or less likely?

  Mr Dicks: When you say "a double-dip recession", is this a sort of two quarters of negative growth—the standard definition of a recession? It is always possible under any scenario to have a couple of quarters where output slips back, but it is not a part of our central forecast; it is not something we are looking for.

  Q28  Michael Fallon: I understand it is a possibility. What I want to know is whether you think the Budget made it more likely or less likely.

  Mr Dicks: You have seen the revisions we have made to our forecasts as a result of the Budget. We discourage, you will see in the Red Book, from making these direct comparisons but there are some Budget measures which will have reduced demand and, in aggregate, between our pre-Budget and post-Budget forecasts, we have taken 0.5% off GDP. So the near-term outlook for GDP is not as good as it was before the Budget. I still do not think that will mean a double-dip, but logically the chances of that happening have increased.

  Q29  Chair: Sir Alan, a moment ago, in answer to questions about your departure, a couple of other points briefly crossed my mind. What are you going on to do?

  Sir Alan Budd: My main ambition is to return to the semi-retirement from which I emerged in order to take on this job.

  Q30  Chair: What remunerated employment?

  Sir Alan Budd: Remunerated employment. As the press release which accompanied the original launch of the OBR stated, I do have three part-time consultancies. I have suspended those while I have been Chairman of the OBR, and I shall, in due course, return to them at a date still to be agreed with those three organisations.

  Q31  Chair: You would agree, would you not, that you have had access to a great deal of market-sensitive information in the course of your brief spell as the first Chairman of the OBR? Do you think that in principle there should be an interval between resuming those jobs and your departure from the OBR?

  Sir Alan Budd: Certainly the propriety of my conduct is supremely important to me. I think, at the moment, I have no access to market-sensitive information at all, because everything I did know came out with the Budget, but I shall take steps to ensure that any risk of this is avoided or, if it happens, it extends the period between my being involved with the OBR and restarting my employment.

  Q32  Chair: With that in mind, do you think it might help avoid any impression of impropriety and bolster public confidence if you referred yourself to the Advisory Committee on Business Appointments, chaired by Lord Laing, even though under the terms of your contract I understand you are not required to do so?

  Sir Alan Budd: That is the first time that has been suggested to me, so it will take me time—

  Q33  Chair: I am surprised by that.

  Sir Alan Budd: I discussed this matter with the Permanent Secretary to the Treasury, and I think we had reached an agreement that the principles surrounding my departure and re-employment were perfectly fair and honest.

  Q34  Mr Umunna: When you were appointed why was it not mentioned that you were going to be in position for three months? I will tell you why I ask this: if you look at the announcements that were made when you were appointed, the impression is very much given that you were going to be in position for some time. In his lecture on 24 February the Chancellor said, in reference to what you may do in-post, that whether he thanks you in a couple of years' time is another matter, but that is the whole point of your appointment. Actually, in the press notice that was released when it was formally announced that the OBR was going to be established, you said: "It is quite remarkable that the Chancellor has given us the authority to produce independent forecasts for the Budget and the Pre-Budget Report, and to provide a public assessment of the action needed to achieve his fiscal mandate. I consider it the most exciting challenge of my professional life." So the impression given by those comments is certainly that you were going to be in position through to the autumn. I have actually looked at your consultancy agreement, and it does have provision in there that allows for the extension of your term. Could you, perhaps, just expand, for our benefit, on the reasons why you decided to leave, and perhaps clear up any speculation there may be that it has anything to do with there being a big disagreement between yourself and the Chancellor?

  Sir Alan Budd: Yes, certainly. I think the comments that other people have made you must ask them about why they made them. You have reasonably referred to my own comments, and I think that on the day on which that announcement was made our contracts were available to anybody who wished to see them, and it was certainly no intention of mine to mislead anybody about the time which I would spend on the job. As I say, what I was not clear about was how long it would take to perform the tasks which were allocated to the interim OBR. Although this does not answer your question, there is not a single person who knows me who was not aware that I was only doing this for the emergency Budget. I regret that there has been a misunderstanding of this matter.

  Q35  Mr Umunna: So you did not intend to be in-situ for the Pre-Budget Report later this year?

  Sir Alan Budd: No. (Conferred with Mr Dicks) Mr Dicks has made a helpful comment to me, because of the way in which various comments are made and maybe a quote from me would explain this. We refer to the pre-Budget forecast. That was the first forecast we produced. That was the pre-Budget forecast. There is, of course, an exercise carried out by the previous government called the Pre-Budget Report which is normally in November. I was not referring to that at all. It is very helpful that Mr Dicks has pointed that out. If I could just answer the question you have asked me, I am absolutely not leaving because of any disagreement I have had with the Chancellor. That is absolutely not the case, and I am simply leaving when I have completed the task that I had been set.

  Q36  Mr Love: Sir Alan, all three of you, if I may say so, are seasoned public servants, yet you are asking this Committee to accept, first of all, that it never occurred to you that when you released this information it was just as Prime Minister's question time was about to occur. You are also suggesting that it should be released to everybody at the same time, but you must have understood that that would be in the hands of government or Treasury officials. Do you think you have been a little naive in the way that this whole debacle has been handled?

  Sir Alan Budd: What I have said is I certainly did not anticipate the furore that this action caused, and if that is evidence of naivety then I absolutely accept the charge. I have been a public official at various stages of my life. It so happens they have never particularly been of the private office type and answering Prime Minister's questions type; I have just been a dull and boring economist doing his best to produce forecasts and matters like that. This is not the sort of area which has fallen to my responsibility.

  Q37  Mr Love: The point I was making was that it is not just yourself but there are three of you who are also seasoned public servants and, as I think you said earlier on, you did consult between the three of you and these decisions were taken collectively.

  Sir Alan Budd: Mr Dicks, I am not even sure you have ever set foot in the Treasury building before. Maybe you have. Mr Dicks has had a wholly innocent life of any public sector employment of any sort. Mr Parker might wish to speak for himself on this matter.

  Mr Parker: My public service is very much the same type as Sir Alan's; again, no private office experience, etc—even more boring statistics, economics and public finances, etc. So pretty much the same applies to me.

  Q38  Mr Love: If I may say so, in politics innocence is no excuse.

  Sir Alan Budd: I am not making an excuse.

  Q39  Mr Love: Can I ask you about the modelling changes that you mentioned in your statement? Of course, this has come under some criticism with particular modelling changes that anticipate things that may have happened rather than government policy. How do you respond to that?

  Sir Alan Budd: Yes, I think we can all speak to this, and it may be better if Graham Parker does so. These modelling changes do not anticipate any policy changes of any sort. If anything, they move slightly away from that to being stylised assumptions about such matters as pension contributions as we move into the future. There are no policy assumptions. There is always a policy implication in any forecast, but there are no policy assumptions built into those projections at all.

  Q40  Mr Love: Unfortunately, we only received this document at 9.30, and that does not breed confidence amongst Committee Members. Let me just ask specifically: the reports in the newspapers suggest that you were anticipating judgments and decisions that may have been made by the Hutton Committee in relation to it. Are you rejecting those assertions?

  Sir Alan Budd: Completely.

  Q41  Mr Love: Can I move on to your forecasting and, in particular, in relation to the contribution that you are suggesting net trade will make to growth in the economy? We have seen a significant devaluation of the pound yet, as yet, not much in the way of an improvement in net trade. Why are you so optimistic that net trade will contribute to growth in the future?

  Mr Dicks: I agree it is disappointing so far. Exporters seem to have taken the depreciation of sterling on their profit margins, but that is always—and has been in the past—the first stage under which you get a supply side response. Profitability of exports has improved; we are more competitive overseas. The article that I wrote for The Sunday Times earlier this year pointed out that in the recovery of the 1990s exports rose by 50%. Obviously, you can never have history repeat itself, but the point, again, in this article was that things always take longer to appear than anyone expects and then, when the price signals and the supply side response is in place, it happens much more than anyone expects. We have looked in detail at the recovery of the 1990s and 1980s, trying to draw comparisons, and the forecast that we have this time round, generally, is a pale shadow of the recoveries we saw in the 1990s and 1980s. We are quite comfortable, given the headwinds, given problems in the financial sector, that the outlook is weaker, but only in degree. I would expect the shape of this recovery, including a strong contribution from net trade, which was your question, to be of an order of magnitude similar to what we have had before.

  Q42  Mr Love: You have just given us the classical economic theory, but there are some reasons to be somewhat sceptical about that. From recent figures from the United States, one of our biggest trading partners, and the continuing fiscal consolidation and other problems that exist in the EU area, our biggest trading partner, it does seem, looking out there internationally, it is quite difficult to be optimistic that, somehow, trade will take off in these circumstances.

  Mr Dicks: Our forecasts for the euro area are below the consensus, so I agree with you there that—well, we are not getting a lot of help in terms of our export markets from our largest export market, but that is part of our central forecast.

  Q43  Mr Love: Can I just say, it is not just the Greeces, the Portugals and the Spains of this world who are retrenching; it is also that Germany is retrenching at this time, which I think is a little more surprising considering the international climate of opinion in relation to that matter. How can you be optimistic on trade?

  Mr Dicks: I think the ingredients are there, as I have said, for a strong recovery on trade. There are two sides to trade, of course: one is imports, and we have a pretty downbeat forecast for domestic demand—and particularly consumer spending—so we are not going to be sucking in imports, and then I think I have talked about the export side. It will take time.

  Q44  Mr Love: Let me ask you one final question, because I think we need to move on: there is quite a lot of evidence in company surveys that they are not looking to increase export markets in the next six months. You would go further head than that, but, again, it would appear that confidence is not there amongst the people that we would be looking to export. Again, does it not cause you concern that the trading part of the way out of this recession back into growth will not be there in the foreseeable future?

  Mr Dicks: One is always worried about a forecast. That is the perpetual life of the forecaster; you produce a forecast and then you check it against what is happening. The most recent purchasing managers' survey on exports was a bit downbeat. The previous CBI quarterly survey showed manufacturers' export confidence at its highest level since 1995. So, yes, of course we are watching the evolution of the data, but we are at that difficult phase, I think, in the economic cycle where you get conflicting evidence. Some surveys are positive—the PMI for manufacturing, as a whole, has been extremely robust over the last several months. Yes, I agree there are downside possibilities on the export front, and we will be monitoring them.

  Q45  Stewart Hosie: Just before I ask a specific question on business investment forecasts, can I pick up on that? Even yesterday currency strategists at BNP Paribas were suggesting that: "The euro rebound we have seen over the course of the past month is coming to an end, providing a renewed selling opportunity", and UBS Investment Bank were commenting on the stress tests, if they were viewed to have unrealistic assumptions. You have set your "below consensus" estimates on exports but does this information coming out about the euro even in the last couple of days not worry you further?

  Mr Dicks: I do not think I am more worried about the euro area than I was, no. The sovereign debt problems have been there for a long time. As I said, our forecasts are fairly downbeat. On the investment front, yesterday's data revised the whole economy investment up to 4.5% in the first quarter (you will never put too much emphasis on one quarter's data), at which business investment was rising—I think it was 7.5%—

  Q46  Stewart Hosie: In that case, let me look to the long and medium term, and this 8-11% increase in business investment forecast, which many people believe to be extremely high indeed. That is obviously going to require capital for investment. The Bank officially tell us that the unused sterling credit facilities have 27 consecutive quarters of negative growth, the most recent being a year-on-year 11.6% shortfall in available credit. That was at the end of May this year. Where is the confidence the OBR has that the cash will be available to meet these investment growth forecasts or expectations?

  Mr Dicks: Well, it is a well-known statistic that something like 80% of all investment is done by 20% of the largest companies who, typically, finance it from internal resources. You could say exactly the same question to me about the first quarter: how come business investment was up 7.5% at a time when the banks are not lending? I think that is part and parcel of the internal financing investment argument, and the private non-financial corporate sector has built up £100 billion of net assets over the last two years; they are not cash-poor. We think, and the Budget will have helped here with its cuts in corporation tax, the fact that it fell such a long way means it has got a long way to come back relative to GDP before you get to a normal investment to GDP ratio. The recovery we saw in the 1990s showed investment up again, and this was in my Sunday Times article, by about the same as exports, 10% a year. Okay, I am not putting all my faith in saying that this recovery will match pari passu the previous one, but it has happened before and I think that conditions are in place with the tax reforms, the cash they have got and a supply-side response that we will see a strong—

  Q47  Stewart Hosie: In a very short yes or no, you have remained confident on this 8-11% business investment growth over the medium term?

  Mr Dicks: It is our forecast, yes. It is our best guess. As the Governor has said on many occasions, all forecasts go wrong, but that, as of now, is our best guess.

  Q48  John Thurso: Can I just go back to the follow-up to the question that Andy Love asked you regarding net trade. Between your Pre-Budget Report forecasts and the forecasts actually with the Budget, you raised the forecast for net trade, not by a huge amount, but it goes up. What were the other factors which led you to that conclusion?

  Mr Dicks: Simple crowding in, crowding out. If the public sector is demanding fewer resources, there are more resources available to the private sector. If your home markets are a bit more difficult and your profits in exports are that much better, you will try harder and, if you are facing weaker demand at home and demand overseas or your pricing is right, then it makes sense to try and channel resources into the export sector.

  Q49  John Thurso: Help me here as somebody who is not an economist. This Budget will be judged by history in some years to come almost entirely on whether the growth side of it has been successful because, without that drive in growth, then we will just have had a lot of pain for not a lot of gain. It relies on quite a growth in the private sector to counter, if you like, the contraction in the public sector. Please tell me that is not entirely on a whim and a prayer, but there is actually something that is going to make that happen other than economic theory.

  Mr Dicks: Well, we have had fiscal consolidations before, a relatively minor one in the 1980s and a stronger one in the 1990s. If you look at our employment forecast as an example, we are forecasting 5% employment growth over the next six years. In the fiscal consolidation of the 1990s, which was similar in magnitude, the deficit went from 7.7% of GDP to a small surplus, so a similar sort of deficit reduction programme, we had employment growth of 7%, and in the 1980s we had 13%. Now, I am sorry to keep coming back to what has happened before, but it is the best guide. We are in a big fiscal consolidation and previous fiscal consolidations have not derailed the recovery, and I do not think this one will either.

  Q50  John Thurso: One could argue we have to go back to 1931 to find a fiscal consolidation of the same size, but, leaving that aside, what I think I need to understand is that the forecasts that you are putting out are not saying, "As a consequence of action being taken, this result will happen", but they are in fact saying, "Based on the probability of outcomes based on previous experience, the likelihood is ... " so there are actually no particular measures or suite of measures that get to your conclusion; it is your best guess as to what the economy will do given the circumstances, because there is quite a distinction between the two. I see you nodding, Sir Alan. I do not know if you would like to comment.

  Sir Alan Budd: I will let Geoffrey as he is doing so well.

  Mr Dicks: Well, economic policy has a monetary arm as well and the Bank of England has taken extraordinary measures to try and keep the economy moving ahead, and one would imagine that, as long as inflation remains under control, the Bank of England will be supportive, the exchange rate is competitive and the private sector, typically, once it gets going, takes up the reins. Our forecasts at least for this year and next are in line with the consensus, bang in line with the consensus, 1.2 this year and 2.3 next year, and I think the consensus is either 1.3 and 2.2 or something like that. In the medium term, we are a little bit more optimistic than some forecasters, but by then the recovery, we believe, will have got some momentum, not just in the UK, but elsewhere, and we do think that the forces of recovery will gather strength.

  Q51  John Thurso: Obviously, public spending and government are going to be a drag on growth; it is an inevitable consequence of the policies. Do you think there are any aspects of government spending which should in fact be protected to help facilitate a recovery in the private sector? In other words, should the Government be thinking through which items of expenditure are genuinely helpful to investment in a recovery, and what might they be?

  Mr Dicks: Well, I think they should be, but that is not one for the OBR. We have been charged with producing a forecast, not with commenting on the sort of mix of policy.

  Q52  John Mann: The definition of "general government employment", could you send us one because I cannot find the precise one—

  Mr Dicks: Central Government and local authorities, excluding public corporations.

  Q53  John Mann:— including a list of what is excluded by it.

  Mr Dicks: It is anyone who works for central Government or a local authority.

  Mr Parker: And/or the central Government associated bodies, including the OBR, for instance.

  Q54  John Mann: So any public servant is excluded?

  Mr Parker: Public corporations.

  Q55  John Mann: Just public corporations?

  Mr Parker: Yes, they are trading, so any body who is actually trading cannot be part of Government in the national accounts.

  Q56  John Mann: But, in terms of the employment projections you have made, how many of the new employees will be migrant workers from elsewhere in Europe?

  Mr Parker: We have no information on that at all. As I think Alan suggested in his introductory remarks, although it is obviously of prime interest to people, the government employment forecast is not a key part of our forecasts.

  Q57  John Mann: But you have forecasted a claimant count and you have forecasted employment.

  Mr Parker: Sorry, yes, I understand what you are talking about.

  Q58  John Mann: So how many migrant workers?

  Mr Dicks: In our assessment of trend growth, which we published in our Pre-Budget Report, Annex B on trend growth, we had an assumption of net migration of 140,000 a year, and we cannot say which particular countries that might come from—

  Q59  John Mann: Obviously not.

  Mr Dicks:— but that was the assumption.

  Q60  John Mann: So 140,000 a year?

  Mr Dicks: Yes.

  Q61  John Mann: What is the basis for determining that? What assumptions are you using?

  Mr Dicks: I think these are based on the ONS's best migration projection statistics. It was as high as 190,000 before, so we are assuming that the overall economic environment will not be so conducive to inward migration, but 140,000 or thereabouts will still be coming.

  Q62  John Mann: But you are projecting growth as, what, approaching two million new jobs?

  Mr Dicks: Yes.

  Q63  John Mann: So on what basis are you assuming that, of those, only a maximum 140,000 will be taken by migrant workers each year?

  Mr Dicks: Well, the demography. There are more people entering the labour market, there are the unemployed and there will be some small net inward migration, but it is more demographic than anything.

  Q64  John Mann: It is a fundamental assumption that you are making there.

  Mr Dicks: Well, demography is demography, is it not?

  Q65  John Mann: How have you accounted for the actual statistics over the last 10 years and compared them?

  Mr Dicks: Well, I think the one statistic that really impresses me is that job losses in this recession were, peak to trough, 740,000, in the recession of the 1990s, 1.7 million, an extra million, and in the recession of the 1980s, 1.7 million, an extra million. This tells me—

  Q66  John Mann: But the free movement of labour has not existed in the European Union in the sense of the 1980s.

  Mr Dicks: This tells me that we have a labour market these days which, for one reason or another, works. You have seen how.

  Q67  John Mann: I am not interested in your view on whether it works. What I am interested in is the projections that you have put in, and the projections that you have put in increases employment and you have got a figure for the claimant count which reduces it. I am asking: how many of those are going to be migrant labour from elsewhere in the European Union and on what basis have you made that assumption? Is it based on a historic analysis of what has happened in the last 10 years or not?

  Mr Dicks: Well, plus or minus a little, and we are not expecting the same.

  Q68  John Mann: So it is based on a historic analysis of the last 10 years?

  Mr Dicks: Well, we have seen large-scale inward migration, particularly from Eastern Europe after they gained accession to our labour markets, the A8 countries. We are not expecting something like that to happen again, but we have projections of the population of working age based on the demography that we all know about. We think, and this was the point I was trying to make, that our labour market works pretty well these days and, as evidence for that, I would cite the freezes and the cuts in private sector pay that we have seen over the last couple of years as people price themselves into work or accept lower pay so that they are not priced out of work in a recession, but we think the labour market will continue to do that. We have falling real wages for the next three years, earnings rising less than the CPI and rather less over the next four years, I think it is, than the RPI, so workers will price themselves into work and the population of working age is rising—

  Q69  John Mann: I understand that, apart from in the last two years of your projections when the increase in wages and salaries is double inflation.

  Mr Dicks: We think that by that time, as the output gap is nearly being closed, you will get normal sorts of increases in earnings.

  Q70  John Mann: So double inflation?

  Mr Dicks: No, not double inflation, but of the order of 2-2.5% a year in line with the underlying productivity growth in the economy.

  Q71  John Mann: In your projections between the average earnings of the public sector jobs that go and the private sector jobs that are created, what is the differential?

  Mr Dicks: I do not think I know the answer to that question. We published on 30 June that release that we have talked about. We published our forecasts for public sector earnings growth both in our Pre-Budget Report and our post-Budget assessment.

  Q72  John Mann: I am interested in the average earnings of the jobs that go compared with the jobs that are created.

  Mr Dicks: Well, that is not ever a part of anyone's forecasting.

  Q73  John Mann: So how do you forecast it? It is a key political assumption and I am not asking you to make political assumptions, but the key political assumption repeatedly made is that the more expensive public sector jobs will go, and you said yourself that flexibility in the labour market and cheaper private sector jobs will come in. The reason for asking is in relation to your forecasts on income tax, which of course are critical to your forecasts on the budget deficit and reduction in that, that you have to have an assumption on that because, if a significant number of public sector jobs are going to go, unless they are pretty much the average of the earnings of the private sector jobs, there is a differential loss in income tax based on your projections, so there must be assumptions made in relation to that, and I am asking what they are. You are saying there are not, which worries me, statistically.

  Mr Parker: There are assumptions made about the overall growth in average earnings in both the private and public sectors. That is the assumption we make. We are not making—

  Q74  John Mann: I understand that, but that is not my question. It is an important issue, and I can see that in there and that is very clear. What is not clear is that public sector jobs go, a significant number, you are projecting, will go. They earn X amount of money and they pay Y amount of income tax. New jobs are created and those new jobs are going to be created in a range of sectors. I put it to you that, going on the last 10 years, significant numbers of those jobs will be in the flexible labour market and very low-paid jobs and, therefore, the net income tax take from those jobs is lower, so I am asking where that is in your assumptions on income tax revenue, which you have increasing significantly and from 2011 onwards you are boosting that up, so the boost-up must be based on some assumptions?

  Mr Parker: The income tax forecasts will be based on the overall forecast of wages and salaries, which is a mixture of the overall numbers in employment and the average earnings increases in both the public and private sectors so, in a sense, we are making that kind of assumption, but what we are not doing is kind of separating out the actual flow from the public sector to the private sector. We are just looking at the overall averages for each sector and that drives the income tax forecast.

  Q75  Mark Garnier:   You talked about the fact that the job peak/job trough was 700,000 jobs, but to what extent is that hiding people who have gone from full-time work to part-time work who are working for the same employer, but who are now perhaps unemployed for maybe one or two days a week?

  Mr Dicks: I have not got the numbers in my head, the change in employment between full- and part-time over the last twelve months or so. There will have been some of that and, no doubt, in the recovery some of the people who are working part-time will be sucked back into longer working hours. Beyond that, we think the private sector will be a net creator of jobs.

  Q76  Mark Garnier: Including taking people back on to full-time work?

  Mr Dicks: Yes.

  Q77  Mark Garnier: So there will be more people in full-time work than there are, if you like, full-time equivalent jobs at the moment?

  Mr Dicks: I would have thought so, yes.

  Q78  David Rutley: Turning to a different subject and moving on to credit availability, obviously this is going to be important going forward, but just looking at the latest Bank of England Credit Conditions Survey, which sets out a pretty continuing hesitant picture, I just wondered if you think that the suggested credit availability will improve enough to help the private sector-led recovery that you are forecasting?

  Mr Dicks: Well, it is one of the Governor's headwinds, and we highlight it—

  Q79  David Rutley: Sorry, I did not hear what you said.

  Sir Alan Budd: The sailing analogy.

  Mr Dicks: We highlighted it both in the pre-Budget and the Budget forecasts. We think that these headwinds, the credit conditions headwinds, will ease slowly through time. The other point I made earlier was that internal finance provides a lot, if not most, of the cash for investment. The problems in the banking sector, as a central guess, would become smaller through time.

  Q80  David Rutley: A different subject again, and I think this is one for Mr Parker or maybe Sir Alan himself, at any time did you discuss with the Treasury the much-talked-about 80:20 rule of thumb ratio on spending cuts to tax?

  Sir Alan Budd: You mean the choice?

  Q81  David Rutley: The choice, yes.

  Sir Alan Budd: No, that is not part of our responsibility; that is entirely for the Chancellor.

  Q82  David Rutley: In terms of the position you do hold, do you regard that as a good decision?

  Sir Alan Budd: I am not commenting on that because it is not within our terms of reference. We note that that is the choice that the Chancellor has made.

  Q83  Mr Love: I want to come back to this issue of your employment forecasts because of course there has been quite a lot of comment in the newspapers, I think you would accept, and I am looking particularly at comments made in The Financial Times where they indicated that, according to their research, for every billion pounds' worth of expenditure reductions under the Pre-Budget Report, 20,000 jobs were lost, but, with the change to the Budget Report, for each additional billion pounds' worth of reduction, that was only 2,000 jobs. Now, I note your comments about the changes in terms of the cost of employing people in the public sector and other changes that you touch upon in your document, but that seems a remarkably large difference. How do you explain it?

  Sir Alan Budd: That is precisely why we have circulated that note to the Committee, and it has been quite an extraordinarily difficult note to produce to delve into the effects of changing the assumptions, but that mystery arose entirely because of an attempt to use our released document of 30 June to assess the effects of the Budget. It was not an appropriate set of numbers to do that and the reason it was not appropriate was between the pre-Budget forecast and the Budget forecast we made a number of changes to the assumptions which affected the path of average pay in the public sector and, because of that, since employment drops out, significant though we know it is, employment drops out and, when you start with a forecast of cash expenditure, that is the limit that applies and that is what it is our job to forecast. We add to that a projected path for earnings and you derive a path for employment by simple arithmetic. Since there had been this change, the attempt to make that sort of calculation could not be done, and we have issued this document precisely so that a fair comparison can be made and, as I said in my opening statement, as far as we can judge, the effect of the June Budget on public sector employment is to reduce it by 160,000, and that is more or less proportional to the effects on employment of the measures that had been introduced in the March Budget.

  Mr Love: I do not think we can go into this now, but can I ask that perhaps this may be an issue that we would want to touch upon when Sir Alan comes back again?

  Chair: We are hoping to do mainly structural issues next week, but we can consider that thought.

  Q84  Jesse Norman: Sir Alan, just to pick up on one thing that you said earlier in relation to the briefing that you put out on the Wednesday, does the OBR have a press officer of its own or does it use the Treasury's press office? How does it relate to the press or put information into the public domain?

  Sir Alan Budd: It does now have a press officer of its own, though this is a Treasury official. Previously, we had a member of the Treasury press team dedicated to us and we can understand that this created difficulties, so we have changed the arrangement and we now have our very own dedicated press officer. He is a Treasury employee, but he does not work in the Treasury press office, he works wholly and exclusively for us.

  Q85  Jesse Norman: And that is a result, as it were, of experience?

  Sir Alan Budd: Well, it is what we have learnt from the, to me, quite extraordinary amount of press interest in our activities. I hoped we just produced a very boring forecast that no one would notice and we could just move quietly on in the way that economists normally do!

  Q86  Jesse Norman: Just picking up on two earlier questions, you obviously privately resolved to depart after the initial period of the interim OBR.

  Sir Alan Budd: Yes.

  Q87  Jesse Norman: Does it sadden you that you will not be actually setting up the permanent OBR because obviously it is some way before the institution itself will have come into being and, therefore, it does raise the question as to why again you would have drawn the line where you did?

  Sir Alan Budd: Because I am doing everything I can to help with the design of the permanent OBR. I think there will be a lull in the activities of the OBR, but during this period there will be continuity in the sense that both Graham Parker and Geoffrey Dicks will remain as members of the Budget Responsibility Committee, so there will not be a complete break, but I think my presence will no longer be necessary after 13 August.

  Q88 Andrea Leadsom: I am sorry, I am jumping back to the previous conversation. You were talking about the prospects for growth and a turnaround in the economy and I just wonder how sensitive you think it is to continuing loose monetary policy. With the prospects for inflation in the near future, do you think the Monetary Policy Committee will need to respond to that, or do you think we can continue as we are, and how important is that?

  Sir Alan Budd: Well, of course it is not for us to try to predict how the Monetary Policy Committee will behave, but what we do know is that the responsibility they are given is to keep inflation at 2%, and they in turn believe that that is best done by keeping the economy fairly close to trend. At the moment, the economy is some way below trend, and we do not completely agree with the MPC about how far below trend we are, but we both agree that the economy is below trend and, therefore, it can safely grow more rapidly without threatening the inflation target. In fact, if it does not move back to trend, inflation will start falling and it will fall and fall and fall, and that is not what the MPC is charged to do, so we assume that they will conduct whatever is the appropriate monetary policy to make sure that the economy does continue to grow until it reaches trend. Now, at the moment, of course interest rates are very low and it has been relying more recently on quantitative easing and it has to judge whether the temporary problems of inflation, how long they will endure, or whether it should look through them and consider where the economy will be in two years' time, and I think they have done an excellent job so far and I hope they will continue to do so.

  Q89  Chair: Sir Alan, thank you very much for coming before us this morning, and we are looking forward to seeing you next week. You have been accused of naivety this morning, which is not the most heinous of sins, but perhaps that point is not lost on anybody who might want to succeed you. It has been a learning experience for us this morning, but it sounds as if your brief tenure at the OBR has been a learning experience for you as well.

  Sir Alan Budd: Yes, and can I make a brief comment on that, and you have been so indulgent towards me. I can say personally that the events of the past few weeks have been, personally, very painful indeed, but I do not complain about that. I volunteered for the job, and we all know what happened to the young lady of Riga, so I do not complain about that, but I would be deeply sorry if any of the mud that has been thrown at me stuck to the OBR because I do believe it is a brilliant and courageous innovation, and we will come back in due course to discuss that, but that, to me, would be a real pity.

  Chair: Well, we will be examining that conclusion of yours in seven days' time. Thank you very much for coming.


 
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