Examination of Witnesses (Questions 1-73)
Professor Stephen Nickell CBE
25 October 2010
Chair: Good afternoon, Professor Nickell.
Professor Nickell: Good afternoon.
Q1 Chair: We have a number of
questions for you this afternoon. First, if you were creating
the Office for Budget Responsibility from scratch yourself with
a free rein, is this how you would create it? If not, what would
you alter?
Professor Nickell: I think that
the general idea is right. It struck me for a number of years
that you need a forward-looking entity. That is to say, you need
some sort of body to tell the Treasury, the Chancellor and the
world where the economy and the public finances are going, given
existing expenditure and taxes. I guess that was about as far
as I'd got when I thought about it. I thought that, in essence,
the OBR had to be forward looking, not backward looking, but precisely
how one should set about constructing this body was not something
I'd thought about very much. If one were given unlimited funds,
I guess it would be really good to have a body that could do everything,
including manufacture the very important fiscal forecasts, which
require a lot of expertise and work.
Q2 Chair: While recognising that
that would create duplication of work done by the Treasury?
Professor Nickell: While recognising
that that would create duplication. In some sense, that might
be the best of all possible worlds. But given budget constraints,
I suspect that we might have a system where, in some sense, the
OBR commissions other entities to provide us with, say, detailed
numbers on income tax revenue after we have given them the broad
outlines of where we think the economy is going in terms of GDP
growth, wages, employment and so on. We might commission them
to provide us with the forward-looking tax revenue path corresponding
to the economic path that we provided.
Q3 Chair: And you're happy with
the extent of, and the limits on, what the OBR can do, as set
out in the proposals from the Chancellor?
Professor Nickell: Yes, I think
we could make a go of it.
Chair: That doesn't sound very enthusiastic.
Professor Nickell: Oh, doesn't
it?
Q4 Chair: "Make a go of it"
sounds as if you think you might not make a go of it.
Mr Mudie: It's just a part-time job.
Professor Nickell: Well, yes.
This is pretty uncharted territory, I would say. As I say, I think
we can make a go of it.
Q5 Chair: So you agree with our
proposal that there should be a five-year review?
Professor Nickell: Oh yes. In
fact, of course, the review will go on all the time because we
will produce stuff, we will justify that stuff and we will, I
hope, persuade everyone that we own these forecasts. The world
will carry on. People will see how well our forecasts do. People
will also see the impact our forecasts have on the behaviour of
the Chancellor, which is pretty important. By the time you come
to a five-year review, it'll be pretty plain whether this thing
is working.
Q6 Chair: But you're clear that
it will be useful to have one?
Professor Nickell: Yes.
Chair: That has been a point of difference
with the Chancellor.
Professor Nickell: Oh, right.
Q7 Chair: The other area
I'd like to explore with you is what happens if the three of you
do not agree. You've said, "it… seems inconceivable
to me that other members of the BRC will publicly dissent from
the published forecast" once you've done it. But what about
the sustainability assessment? Don't you think it's possible that
the three of you may take different views of the sustainability
assessment?
Professor Nickell: Yes. When it
comes to the future, people's views tend to differ, in my experience,
but you have to reach a compromise.
Q8 Chair: So will this be a compromise
body or a body where the chairman says what he wants and the others
fit in? Will it be one where the three of you may express different
views in public on sustainability? I'm trying to be clear what
role you envisage playing.
Professor Nickell: This isn't
the Monetary Policy Committee. Expressing different views in public
is not a good idea.
Q9 Chair: Unlike the MPC, where
that does go on?
Professor Nickell: Unlike the
MPC, which has to have that, in the sense that individual members
are individually responsible for their votes. It would be almost
inconceivable, given that they have different votes, if they did
not disagree in public. But the Budget Responsibility Committee
is a completely different entity, and it would probably not work
out well if we came to the public and said, "Well, I think
this, but he thinks that." That's just not going to work.
Q10 Chair: Even though you've
just agreed with me that it's quite likely that views will differ?
Professor Nickell: Yes.
Q11 Chair: So you're going to
be asked to suppress what you really think whenever you're asked
about it in public?
Professor Nickell: Yes.
Q12 Chair: And say whatever you
think the agreed line is?
Professor Nickell: Yes.
Q13 Chair: So you're going to
muzzle yourself for the duration of your time on this committee?
Professor Nickell: Yes.
Chair: Well, I think
we're at least understanding the way you see it. Now I understand
why you said that you think you'll make a go of it, and nothing
more encouraging than that.
Q14 John Thurso: In your questionnaire,
you state you have "excellent communication skills",
and you cite your performance in front of this Committee as evidence
of that. You say that that was at a time "when the Treasury
Committee was a great deal more aggressive than it is today."
Does telling us we're pusillanimous equate to good communication
skills?
Professor Nickell: No. If you've
read the transcripts, you'll know that I'm telling you that you're
not as rude as some of your predecessors, which doesn't seem to
be bad communication.
Q15 John Thurso: Do you think
that being aggressive is a good thing?
Professor Nickell: It depends
how aggressive aggressive is. Obviously, a certain amount of aggression
is part of the cut and thrust of life, but being blatantly rude,
perhaps not.
Q16 John Thurso: So that level
of aggression was actually unhelpful?
Professor Nickell: Well, I was
present and I was made uncomfortable.
Q17 John Thurso: The serious side
of that question is about how best this Committee can scrutinise
effectively what the OBR does and what you do. What should we
be doing to ensure the best scrutiny?
Professor Nickell: We will produce
a forecast and lots of numbers, so the first question you should
ask us is, "Why this forecast and not that forecast?"
You'll have other forecasts to look at, such as those produced
by the National Institute and the Bank of England, so you could
also ask, "Why are you right and they are wrong?" Sometimes
that can be quite a tricky one to answer, so it is a good question.
I think that over the longer term this whole activity will stand
or fall on whether it makes a significant contribution to maintaining
control of fiscal policy. That is to say, we will come up with
forecasts that will imply a certain path of the deficit. Those
forecasts are bound to be wrong, but they will be continuously
updated so that in time, I hope, we will observe that the path
of the public finances and of the deficit does not systematically
veer away from the path laid down by the Chancellor and the Government.
If that happens, and if our forecasts lead that to happen, we
will have failed.
Q18 John Thurso: That leads me
to my second question, which is more technical and is about the
use of fan charts, which the MPC uses, and with which you will
be familiar—the Governor has often said to us that the one
thing you can guarantee won't happen is the central projection,
and we all understand that. They give a very good handle on the
degree of confidence felt by the Bank about what it puts forward,
and they show the ranges, so one can then explore the issues around
that. Would it be useful for the OBR to adopt that tool and a
similar approach? At the moment we have a "better than 50%"
approach, which is kind of an "either red or black"
approach.
Professor Nickell: At least it
is a probabilistic statement. The temporary OBR did produce a
forecast with fan charts, and they at least make it plain that
there is an uncertain future. I hope that we will be able to be
a bit more precise about what the risks are and where the dangers
lie, because we will be making a five-year forecast that will
include judgments. For example, we might have an output gap of
a certain size, and we will tell you what we think it is and then
state a rate at which we assume it will close. By the time we
get to three, four or five years out, that will be a pretty judgmental
exercise. You will not have much evidence on that. You will look
at the history of past episodes. Supposing we are wrong and it
goes a bit slower than that, we will then of course want to tell
everybody. Supposing it goes a bit faster, what will happen to
the public finances? I hope that such discussions will be very
useful, because after a year or two we will have more information
about how fast it is going, so you will be able to look back and
ask whether the pessimistic or the optimistic view is turning
out.
Q19 David Rutley:
Professor Nickell, in your questionnaire, you rightly talk about
the importance of independence of thought, and you've demonstrated
that, but you don't give quite as much evidence about another
important quality for membership, which is being a team player.
When you start talking about doing iterative forecasting, working
as a team is going to be vitally important. What do you believe
are the qualities required in a team player, and do you have them?
Professor Nickell: What are the
qualities? You make your contribution to the team. You set out
what you think—everyone sets out what they think—and
then you bat it backwards and forwards. A team player is someone
who doesn't grandstand, is prepared to strike some kind of compromise
and aims to try and get some kind of agreed outcome. I always
think, in these things, that a team player is someone who tries
to move towards an agreed outcome. The alternative is a sort of
grandstander figure, whose aim in life is to demonstrate that
they're a very strong-willed person. While being relatively strong-willed,
I hope—well, I know—I'm able to get everyone to go
towards some kind of compromise.
Q20 David Rutley: Can you give
any evidence of situations that would be relevant here where you've
done that?
Professor Nickell: Roughly six
times a year, I chair the college governing body, which is a fractious
bunch of people who often don't agree with each other. I find
that my job is both to be a team player and to encourage other
people to be team players, so that one doesn't end up, on too
many occasions, having to say, "Fine, we'll vote." In
some sense, when you get to the point of "All right, we're
going to have to vote on this," you've failed in moving people
towards some kind of compromise. So I'm quite used to that sort
of thing, and I try and ensure that we don't have too much voting.
Of course, in this context, three people voting is kind of silly,
in some sense. The other thing in this context is that it's not
just us three. There's the rest of the team, as well. In some
sense, you have to carry those people with you. We can't get away
from the rest of the team, because they're doing all the hard
work, in a sense.
Another example: on the MPC, I was one of the
people who both knew all my fellow MPC members and got on very
well with the forecast team as well. To some extent, I used to
translate one group to the other group. That worked quite well,
I think.
Q21 John Mann: Professor Nickell,
what's at the top of your priorities in terms of undertaking any
research while at the OBR?
Professor Nickell: We want to
look into fiscal issues which are of great concern to the general
public. I think we'll probably pursue the issue of public sector
pensions—although of course Hutton has now done quite a
lot of work in that direction already—issues about public
sector liabilities, PFI and those sorts of thing. I would like
to think that we can bring all this into the light of day and,
in a relatively simple way, clarify precisely what is and what
isn't a real liability and so on. The long-term public finances
are the area I would like to look at.
Q22 John Mann: Over the last year,
I have noted a great reluctance by anybody to give me any information
in relation to net migration—forecasts on net migration
and how that will impact on future jobs and future tax revenues.
Can I be more optimistic, with your appointment, that these issues
will be fully outlined in terms of projections?
Professor Nickell: I know quite
a bit about net migration and the Office for National Statistics
produces projections for net migration that are generally based
on extrapolating recent trends. While that is a very interesting
subject, I am not entirely sure that the OBR is the best body
to pursue it. I can see that, looking forward, when we are looking
at the potential output, one of the key variables is the growth
of the labour force—the population of working age—which
depends in part on projections of net migration. My guess is,
when we produce our potential output numbers, we will have something
to say about net migration. But, I am not sure how far beyond
what the ONS does that will be.
Q23 John Mann: Thank you for that.
In March last year, I noted that you stated that the "VAT
cut"—that is the VAT cut put in place by the last Government—"had
a positive impact on real expenditure." You have given some
statistics to demonstrate that. Do you anticipate that the VAT
increase that is about to come in will act in a similar way in
terms of the economy?
Professor Nickell: I think that
what I said is that the VAT cut had a positive impact on real
consumption. I don't know whether you referring to my Prospect
article.
John Mann: Real expenditure went up.
Professor Nickell: There was some
paper put out by KPMG, or one of those types of organisations,
that said that expenditure was more or less unchanged after the
VAT cut, which meant that it had had no effect. I simply pointed
out that if expenditure was unchanged and the VAT cut made prices
lower, real consumption must have gone up. I would expect real
consumption to go down when VAT rises. But, it is not quite the
same thing as expenditure.
Q24 John Mann: No, no. In an article
headed "Labour's poor predictions," you also countered
against overly optimistic forecasts on growth.
Professor Nickell: Did I?
Q25 John Mann: Yes. Do you perceive
that you might be feeling—you may not choose to do so—that
there may be need for another such article in the next few years
in terms of growth forecasts?
Professor Nickell: My feeling
about growth forecasts is that I have never thought of the Government,
the Treasury or anybody being any worse than anybody else. Looking
at the past, I have never been particularly struck by the fact
that official forecasts turned out to be more wrong than any other
forecasts. So, historically, the difficulty has always been, in
my experience, that the forecasts of the tax revenues have tended
to come unstuck, rather than the actual growth figures. I would
hope that our forecasts won't.
Q26 John Mann: A final question.
You've recently written, talking about the financial crisis,
that it was "exacerbated by poor quality lending on credit
cards".
Professor Nickell: Yes.
Q27 John Mann: But 18 months ago
you said, "So what happened to British banks to get them
into such a mess? It is thought that they lent their money unwisely,
giving mortgages to people who were unable to pay or credit cards
to reckless spenders. In fact, British bank lending was relatively
prudent except perhaps with some of their corporate loans."
You seem to have changed your mind over the 18 months in relation
to credit cards and lending. I wondered why that was the case.
Professor Nickell: Well, in that
last thing you were quoting from, I don't think I said the credit
card lending was that bad. I said that banks lost more on credit
card lending than they did on mortgages. I guess the main point
I was trying to get through in both cases was that the UK banking
system's lending in the UK mortgage market has been relatively
prudent; indeed, I would say very prudent, given that the losses
on UK mortgage market lending have been negligible compared with
the losses that the UK banks have made investing in US sub-prime
mortgage-backed securities.
The credit card thing: I don't think they were
overly bad with credit cards, but they did lose more on credit
cards than on mortgages. That's true. One can't always be absolutely
consistent in everything one says.
Q28 Mr Love: Professor Nickell,
the terms of reference for the OBR state: "The OBR will not
comment on the design of the fiscal mandate." Are you content
with that restriction, or do you think there are any possible
frictions that may arise as a result of it?
Professor Nickell: No, I'm content.
I mean, the fiscal mandate is, one might say, the essence of
politics, and fiscal policy is the essence of politics. The less
the OBR gets tangled up in that the better, so I am quite happy.
Q29 Mr Love: Can I ask you about
disclosure? The interim OBR made great play of its willingness
to disclose things that hadn't been disclosed in the past. Yet
again, the terms of reference say: "The OBR should observe
the standard confidentiality rules in relation to policy information
and data". Do you think there's a friction there that could
arise—that you would want to disclose things?
Professor Nickell: I don't know.
I'm not used to that sort of thing, so I don't know. Maybe there
will be, but it's very hard for me to say at the outset. I mean,
I assume that that sort of thing means we don't tell everyone
the Budget secrets, and that kind of thing. Ex post, obviously—
Q30 Mr Love: Well, let me ask
the question in a slightly different way. If Treasury officials
came to you and said, "We'll give you this information, but,
by the way, it's a Treasury secret," would you feel that
you were being manipulated by the Treasury, in relation to what
you could disclose? And what would you do in circumstances of
that nature?
Professor Nickell: Well, if it
was a genuine secret—that is to say, if we knew the Chancellor
was going to raise income tax next Budget, that is a genuine secret—I'd
be perfectly happy with that. Obviously, afterwards it's public
knowledge. But if, in my view, it's not a real secret, I might
argue. But in some sense I don't want to get into a position
where I'm sort of giving away tittle-tattle, or that sort of thing.
One can discriminate between genuine secrets, such as the outcome
of Budget policies, and the things that people feel ought not
to be made public, in which case I could argue about it. If I
had an example, it would be much easier.
Q31 Mr Love: The terms of reference
say that you will be responsible for determining your work programme.
Again, that can be manipulated by the resources that are available,
and by whether or not you are covering your remit—this is
over and above your remit, of course—in the terms of reference.
Do you think that there is a likelihood of frictions arising there?
For example, essential work as far as the Office for Budget Responsibility
was concerned might not be considered essential by the Treasury.
Professor Nickell: I don't know
whether the OBR would consider it to be essential. I can imagine
being in a position in which we would say, "If we are going
to make a good job of this"—I mean, of some particular
activity—"we need more resources." If we can't
get those resources, we can't get them. There is bound to be that
kind of friction.
Q32 Mr Love: Let me give you a
very specific example. There has been some comment that the Government
have asked you to produce the next forecast—the autumn forecast—on
29 November. Quite a lot of people think that it should be produced
much sooner. Does the OBR have an influence on when that forecast
should be produced?
Professor Nickell: Now you have
asked me a question that I don't really know the answer to. How
can it be produced much sooner? It does not seem physically possible,
given that the comprehensive spending review numbers only came
out not long ago.
Q33 Mr Love: Let me get to the
point that I am trying to get to through these questions, which
may seem somewhat elliptical. It says also in the terms of reference
that "the OBR will be accountable to Parliament for the delivery
of the tasks set out in this Terms of Reference." Do you
think that there is a public interest test on disclosure and timing?
I am talking about not the essentials of the remit that is given
to you by the Treasury and the Chancellor, but the other issues.
The public interest test would be that you show your independence
of the Treasury on matters where there is some independence to
be expressed.
Professor Nickell: We have to
produce two forecasts a year. As for what else we do, as I have
said before, we should do things that people are interested in.
In "people" I include the Treasury Committee, Members
of Parliament and the general public. If the Treasury does not
particularly want us to pursue this or that matter, my predilection
would be to go ahead.
Q34 Mr Love: I am pleased that
you say that, but I come back to this question. The OBR has been
set up, and all the statements and information suggest that it
is independent. What I want to tease out here is where that independence
will express itself. We understand that you have a remit, and
that policy and the fiscal mandate are matters for the Chancellor
and the Treasury, but given that you are meant to be independent,
where would you express your independence?
Professor Nickell: The main area,
I hope, is in the production of our forecasts. It is absolutely
crucial that people don't go around saying, "Oh, well, these
forecasts are basically Treasury forecasts. These guys aren't
independent." It is up to us to demonstrate that these are
our forecasts, and not anybody else's forecasts. I don't know
whether we can succeed in that. I've talked to people from time
to time over the past few months, and loads of people have said,
"Oh this bunch, they're in the Treasury. How can they possibly
be independent?" It will help when we move out of the Treasury.
It's going to be very difficult because of the fact that one of
the forecasts every year is going to come out simultaneously with
the Budget. I am not quite sure how that will be organised, but
certainly the Chancellor is going to announce the thing in Parliament
on the 29th, as I understand. On the extent to which we can say,
"This is ours", it's all going to be quite difficult.
I don't see any trouble with the other stuff
you were referring to, the other bit of the work programme. I
think that we can more or less pick what we like, and if it turns
out to be a bit embarrassing, then so what? Our key issue and
problem is in persuading people that we are independent when we
produce these two forecasts a year. That is absolutely vital.
Q35 Stewart Hosie: You said a
while ago that the OBR needed to be precise about risk and where
the dangers lay.
Professor Nickell: Yes.
Q36 Stewart Hosie: You then went
on immediately to talk about the output gap.
Professor Nickell: Yes, as an
example.
Q37 Stewart Hosie: Indeed, as
an example, but it was immediate. Where in your view is the biggest
danger to the output gap being closed and the fiscal mandate being
met?
Professor Nickell: Credit. I think
that credit markets are so tight. For first-time buyers, it is
so hard to get a mortgage. Fundamentally, that is not because
banks are being overly cautious; it is because they don't have
the money to lend. We have never quite seen this before, except
perhaps in the 1970s when credit was restricted by a bunch of
regulations and so on.
Q38 Stewart Hosie: Do you think
that when the forecasts are produced, the GDP deflator or the
fiscal multiplier of a credit squeeze—and the impact of
that—is properly calculated?
Professor Nickell: I think that
people do the best they can. You say "properly calculated";
we'll know in 10 years' time whether it's been properly calculated.
In some sense, history is not fantastically revealing in this
area. That is why there is a high degree of uncertainty and why
I think that the Bank of England is very concerned about lending
and the extent to which lending can support growth in the private
sector. That is the big area of uncertainty.
Q39 Stewart Hosie: In terms of
the way that this is reported, the Red Book was very clear, with
its fiscal multipliers, on the VAT change, the personal tax changes
and other measures. Do you think that there should be a specific
multiplier or deflator included for the credit situation at any
given time on any given forecast?
Professor Nickell: I think the
way that we'll do it will be to use a lot of words and have various
scenarios. I don't think that there's enough information or enough
data historically to start being fantastically precise about the
impacts of the sort of credit shortages we have, and what would
happen if they were relaxed by a certain amount. I don't think
that we have enough information to be that precise about it. With
VAT, you have a great history. VAT changes have been going on
for the past 35 years, so looking at the impact of VAT changes
on expenditure over that 35-year period enables you to get quite
a good handle on what happens when you change VAT. But big credit
squeezes of the type that we have got now are just not that common
in history, so it becomes much more difficult to get any precise
level of measurement.
Q40 Stewart Hosie: I understand
what you are saying about VAT—of course there is a lot of
evidence and data, so you can look at that. I also understand
that because the nature of this credit squeeze is quite unusual,
it might be difficult to calculate, but I am interested in going
a little further with this, in terms of the deflation effect.
By the time that we get to 2014-15, the cuts alone are £81
billion. With GDP at about £1.8 trillion, that is a 4.5%
cut, which is the equivalent of sucking consumption out of the
economy to the tune of 4.5% of GDP. How will the OBR factor in
cuts of that magnitude to that year?
Professor Nickell: Basically,
the way that you do that is you look at the impact of the fall
in Government expenditure on overall demand, and so on; you look
at the impact of that and the impact of other tax increases, such
as the rise in VAT and so on, on consumption expenditure, and
you add it all up. Then, you make what forecasters call some judgments,
which involves batting backwards and forwards the questions, "Is
the effect this size, or that size?", "Is it too big,
is it too small?", and "How does the history look?"
We have seen some histories of cutbacks in Government
expenditure. The cut in Government expenditure is quite complicated,
because in fact what the Government have done is produce a nominal
path for expenditure, and they have made some assumptions about
how prices will go, but of course we know that in different public-sector
activities, different prices are important. In some public-sector
activities, wages are fantastically important. The public sector
itself has some control over wages. One could easily imagine situations
where somebody has been given some nominal cut and they can go
to the work force and say, "Look, if you have a wage path
of this, your job losses would be somewhat lower"—those
sorts of issues. There is a lot to play for in all this, I think.
Q41 Stewart Hosie: Indeed. I have
a final question. Given that your answer was credit—I wasn't
expecting that—
Professor Nickell: Sorry.
Stewart Hosie: No, no. Given that, and
given the tax rises, which I haven't mentioned, and the huge package
of cuts, do you think that the OBR will want to produce a more
enhanced narrative to explain the impact of the component parts
of the measures taken during the next few years?
Professor Nickell: I hope so;
I hope that we will be able to produce that. We will produce an
overall forecast, and I hope that we will be able to give as much
detail as possible on how we think things could, or may, pan out.
Whether that will all be done by 29 November, I don't know, but
of course in a sense there is time, because these cuts will not
go away. So if we say something in more detail at some later point,
that work is not entirely wasted effort.
Q42 Mr Umunna: Can I just ask
you a little about the unemployment forecasts for the OBR, both
private and public? Actually, before I ask you about those forecasts,
what do you think you will bring to the table in that regard?
How do you think you will add to the OBR's forecasts on unemployment?
Professor Nickell: I know quite
a lot about the ins and outs of unemployment but making unemployment
forecasts is, in some senses, kind of simple stuff. Basically,
you work out your output forecasts and then you have some notion
of productivity, and that generates an employment forecast. You
then make some forecasts about the population of working age,
and so on, and then you end up with some kind of unemployment
forecast.
The relationship between public and private
is, of course, trickier. My guess is that what typically happens
is that an overall forecast is made, and then public sector employment
is looked at on the basis of Government expenditure, and that
sort of thing, so then you get public sector employment going
forward. The difference between total employment and public sector
employment is private sector employment. That is typically why,
when people are asked where the jobs are coming from, they can
never answer that question.
Q43 Mr Umunna: You have gone where
I was going to go with my questions. As the public sector retrenches,
the OBR has forecasted, if you look at the figures, that the private
sector will create more than 2 million jobs between 2010 and 2014.
Do you think that that forecast is realistic, considering that
1.6 million jobs were created in the private sector between the
first quarter of 2000 and the first quarter of 2008? Those were
boom times, so do you think that the OBR's figures are realistic?
Do you think that we will see the private sector create more than
2 million jobs over four years?
Professor Nickell: Let me explain
how I think that that might work. The reason fewer private sector
jobs were created in boom time was because so many public sector
jobs were created. I used to go on many regional visits with the
Bank of England to the north of England, where I talked with lots
of employers in lots of places. Those employers were always moaning
about the boom in public sector jobs and about how public sector
pay was so high, which limited their ability to expand because
they had to compete with that pay. Public sector pay tends to
be uniform, so in places such as the north-east it is good pay.
Those employers said that they were stymied because, by competing
with the public sector on pay, they couldn't expand their businesses
as fast as they would like.
There is an interaction between public and private
sector employment. There are different labour markets in different
areas of the country. If the public sector wants lots of people
it bids up wages, which forces the private sector out of the market.
That won't happen now.
Q44 Mr Umunna: So you think that
the OBR's forecast that 2 million jobs will be created in the
private sector is quite likely to happen?
Professor Nickell: I am trying
to give you the reasons for thinking that that forecast is not
completely stupid.
Mr Umunna: I am asking whether you believe
that it is going to happen, but you have said only that it might
happen.
Professor Nickell: Why don't you
wait until the OBR produces its next forecast? You will then know
precisely what I believe, or at least what the OBR believes.
Q45 Mr Umunna: I now want to ask
a more general question, which links to my scepticism about those
forecasts of private sector job creation. When the Committee asked
Geoffrey Dicks—I think that it was in July—whether
he thought that the emergency Budget, which is obviously linked
to and is fleshed out and given more detail by the CSR, will make
low growth or a double-dip recession more or less likely, he said
that he thought that it would make a double-dip recession marginally
more likely.
Professor Nickell: I should hope
that he did.
Q46 Mr Umunna: Do you subscribe
to that view?
Professor Nickell: Of course.
Q47 Mr Umunna: So your view is
that the measures outlined this week in the CSR make a double-dip
recession more likely?
Professor Nickell: No. I mean
that the reduction in expenditure, which was laid out in the June
emergency Budget, would make a double-dip recession more likely.
It is my belief that a big reduction in Government expenditure
has a negative impact on the economy.
Mr Mudie: One of the things that has
concerned the Committee about the OBR is its independence from
the Treasury, and that is one of the reasons for the views being
put forward. We want to have a look at its position. The thing
that jars about your letter of application—
Chair: George, it
is being mentioned to me by the Clerk that this should be dealt
with in confidence.
Q48 Mr Mudie:
Do you mind my asking a question, or should this be in confidence?
I will cheerfully take your decision.
Professor Nickell: I have nothing
in there that I would mind being made public.
Q49 Mr Mudie:
Good, that is appreciated. Against our need to be sure that you
are truly independent, you were on the MPC, and you say that you
were the first external member to be reappointed.
Professor Nickell: Yes.
Q50 Mr Mudie:
You then use words that worry me: "I think I can safely say
that I was widely trusted." By whom? Was that: Mervyn thought
you were a safe pair of hands, so you could cheerfully be reappointed
because you didn't cause any bother?
Professor Nickell: I think I was
widely trusted by the general public and their representatives.
Q51 Mr Mudie:
Who would their representatives be?
Professor Nickell: This Committee,
the press. I meant by that that I had a good reputation for trustworthiness.
Q52 Mr Mudie:
You can see, though, where I am coming from.
Professor Nickell: You think I
am saying that I can be trusted to toe the line.
Mr Mudie: Not to
rock the boat.
Professor Nickell: The fact that
I was the first person to be reappointed: ooh, wow, I must be
in Gordon Brown's pocket.
Q53 Mr Mudie:
Isn't that how the civil service works? They do not want somebody
like me, who is a bit "untrustworthy".
Professor Nickell: Okay, if you
look at what I said and look at my voting record, which was described
by somebody as "activist"; that is, relative to most
people, the number of times I voted against the majority was considerable,
and not only in one direction. I was not just a dove or just a
hawk—I voted against the majority on many occasions and
in opposite directions. That is what I meant.
Q54 Mr Mudie:
The only thing added to that that bothers me is that this is a
well paid, three-day-a-week job. If you had a five-day week on
that salary, you would almost be reaching the Prime Minister's
wages, so it is well paid. You are a member of the Welsh Assembly
Government's Economic Research Advisory Panel.
Professor Nickell: Not any more.
Q55 Mr Mudie:
Warden of Nuffield college.
Professor Nickell: Yes, I am that.
Q56 Mr Mudie:
Chair of the board, National Housing and Planning Advice Unit.
Professor Nickell: That is being
eliminated.
Q57 Mr Mudie:
I will come back to that. You said something in your letter which
I cannot read, but you said that you had a very full diary, and
it would be—[Interruption.] Let me finish, because
there is a senior one: board member of the UK Statistics Authority.
How much bloody time does all that take? I missed out chief, Advisory
Committee on Civil Costs.
Professor Nickell: Yes, but that
is kind of in abeyance. I have told them that if it is resurrected—if
it becomes very active—I will not do it. I have told Michael
Scholar, who chairs the UK Statistics Authority, that I would
leave if I got this position. I have already told the ERAP chair
that I am leaving, so, basically, I have been clearing the decks.
I'm going to remain as warden of Nuffield college, but otherwise
I'm clearing the decks.
Q58 Mr Mudie:
Are you going to give us three days a week from the date you
start?
Professor Nickell: I am going
to give you more than three days initially, because we have to
produce a forecast.
Q59 Mr Mudie: I don't want you
to commit yourself to working overtime. Are you going to give
us three days a week?
Professor Nickell: Yes. On average,
I will give you three days a week.
Q60 Michael Fallon: Do you expect
at any point to move away from the economic models that are currently
used at the Treasury?
Professor Nickell: It wouldn't
surprise me if we did a bit of bells and whistles on them. My
guess is that it is highly unlikely we will be like the Bank of
England and construct a whole new model from scratch, because
we don't have the resources to do that. Nevertheless, I am pretty
certain that we will make some adjustments to that model.
Q61 Michael Fallon: What kind
of bells and whistles did you have in mind?
Professor Nickell: I don't know.
Credit is a big bell and whistle, but I am not sure that I know
how to adjust things. I have some ideas of how it might be done,
but actually getting it all working would take a bit of time.
In the meantime, one has to use judgments and little models that
you build yourself to afforce what comes out of the Treasury model.
That's my understanding of what goes on now anyway. I don't treat
it as a monolithic entity that yields the final answers.
Q62 Michael Fallon:
But how important do you think it is for the Office that it
does not, in fact, own its own forecast model?
Professor Nickell: I don't think
that matters very much. The forecasts that people make are, generally
speaking, completely different from the output of these models.
There are people outside the Treasury who produce forecasts that
are so-called "based on the Treasury model", and those
can be completely different from other forecasts that are based
on the Treasury model.
In my view, the restrictions provided by models
are relatively light, in the sense that if I produced a forecast
using the Bank of England model, and also produced a forecast
using the Treasury model, my forecasts wouldn't be very different.
They probably wouldn't be different at all.
Q63 Michael Fallon: You have been
very critical of the failures of Treasury forecasting and particularly
of tax revenues in the last decade.
Professor Nickell: Yes.
Q64 Michael Fallon:
Why do you think they made such mistakes?
Professor Nickell: I don't know.
You'd have to ask someone else.
Q65 Michael Fallon: I'm asking
you.
Professor Nickell: I know you
are, but I don't have inside information. I know that from 2001
to 2006—leaving aside the fact that in 2007-2008, it is
obvious that your forecasts of tax revenues were going to be wildly
off—the tax revenue was seriously over-predicted in every
single year. I don't know why that happened, because I wasn't
in the Treasury at the time—maybe it was an accident. Someone
once said to me, "There's a lot of serial correlation in
these things," which means that it is in the nature of things
that you often get things wrong, although it is quite unusual
to get them wrong in the same direction all the time.
Q66 Michael Fallon:
Yes, exactly, so was there something wrong with the model, the
forecasters or those in charge of—
Professor Nickell: As far as I
know, there's nothing much wrong with the GDP forecast, so it
wasn't that they were over-forecasting GDP growth. It was, given
that, there was an over-forecast of the tax revenue. I wouldn't
like to speculate.
Q67 Mark Garnier: I'd like to
talk a little about the MPC and its work. We've talked a lot about
various effects that certain things are having on the economy.
In response to Mr Umunna's question, for example, you talked about
how one of the effects of these cuts is that they will get the
public sector out of the way of the private sector to allow it
to grow, which is a very helpful thing. Also part of the rationale
for the spending cuts is that they will allow monetary policy
to have more of an effect. Nominal interest rates are pretty much
close to zero, so the only thing really left available to the
MPC is either to increase interest rates, having an effect in
one direction, or to have an effect in the other direction and
press a pedal on quantitative easing. I have two questions. First,
how likely do you think that is to happen, and secondly, what
do you think the effects will be if it does happen?
Professor Nickell: How likely
is it to happen? I don't know. I don't want to be so simple-minded,
but you could ask the people concerned. I guess it's certainly
a possibility. One or two members of the MPC seem to be quite
keen on it. What impact would it have? Basically, since much of
the quantitative easing consists of the Bank of England buying
Government securities, it tends to have a downward impact on long-term
interest rates, which is generally thought to be expansionary.
Another problem, as we know, is what this credit
shortage means for people who rely on banks for their credit.
One of the things quantitative easing seems to have done is open
up the commercial bond market, so if you're a company that is
big enough to borrow in the commercial bond market, that's had
a positive impact, but for people who rely on the banking system
for their credit, it doesn't seem to have made a great deal of
difference to their position. But it has held down long-term interest
rates, so it has certainly helped those companies that are borrowing
in the commercial bond market to get cheaper finance.
Mark Garnier: Let me explain where I'm
going with this. At the same time as setting up the OBR, we also
have the FPC being set up, so there are now more and more—
Professor Nickell: Sorry, what's
that?
Q68 Mark Garnier: The Financial
Policy Committee, which is also being set up as part of the new
regulatory regime that is under way at the moment. It strikes
me that there are more and more macro-prudential tools that are
going to be used, certainly with the FPC, but also, by the time
you add in the effect of quantitative easing, interest rates and
all this kind of stuff, there are an awful lot of manmade influences
that are being effected in the way the economy is run, over and
above the Chancellor. How will that make the life of the OBR easier
or more difficult? Do you see it as a big problem? At the end
of the day, you're not going to be able to predict what the FPC
will do in terms of popping a bubble, or the MPC in terms of quantitative
easing. There are a lot of random elements in there, and that's
going to make it even more difficult. How will you deal with that?
How will you hold the Government to account?
Professor Nickell: With the MPC,
you have, at least on interest rates, some track record, so you
can roughly say how its interest rate policy might depend on the
standard things: inflation and the level of activity in the economy.
As for these other bodies and what they are going to get up to,
if we were forecasting some dramatic asset price growth, we would
simply say it seems plausible that somebody might try to do something
about this, by restricting credit or by some macro-prudential
activity, and we would take that into account. That is the only
way we could do that.
Q69 Mark Garnier: A lot of people
believe that we are currently in a property bubble at the moment,
but there could come a time when a property bubble could have
got a bit bigger and we could have had more credit around, but
the FPC popped that bubble or put the brakes on it, and that could
cause unforeseen problems in the economy. Will you comment on
that in your reports in the OBR? Will you say they got it wrong,
or they put their foot on the brake a bit too hard, or they did
not put their foot on the brake?
Professor Nickell: No. My guess
is that we will not be in the business of saying "X got it
wrong," or "This was too this." One does not have
to say that sort of thing; you just say, "Here's our forecast,"
and you explain it, and there it is. In some senses, you do not
have to say, "This was too much; this was too little; this
was too slow; this was too quick." You just say, "Here
is the forecast." If it looks bad, people can draw conclusions.
That would be my instinct.
Q70 Mark Garnier: The other side
of this—also something that slightly bothers me about the
OBR—is how it could end up being the tail wagging the dog.
If the FPC and the MPC start looking at what you are saying, do
you think it is possible they may start reacting to your reports,
or do you think they will continue to be completely independent
of what you are doing?
Professor Nickell: I am sure that
everyone will look at everyone else's forecasts. We will look
at the Bank's forecast, which will come out before 29 November.
We will look at the National Institute's forecast, and it will
look at ours. I am not entirely sure what effect that will have.
It might have the effect of no one wanting to be too far out of
line in all these things. I do not see anything much beyond that,
and I do not think it really interferes with people's independence.
The forecasts will be different, nevertheless. Just because the
Bank is a bit more bullish on this, or bearish on that, that will
certainly happen. Just as the innumerable forecasts produced in
the private sector vary quite significantly, the official forecasts
will also vary reasonably significantly.
Q71 Mark Garnier: Yes, but this
is the official body, which shines a light on the Chancellor and
the Government.
Professor Nickell: Indeed it is.
Mark Garnier: Goldman Sachs, and everything.
Professor Nickell: That does not
mean that everyone will believe us. You can rest assured that
there will be people out there who will say that our forecast
is too optimistic or too pessimistic, official though we may be.
Q72 Mark Garnier: You will, of
course, be under political scrutiny. People will be using exactly
what you say for political ends.
Professor Nickell: Absolutely.
Q73 Mark Garnier:
How do you see yourself dealing with that?
Professor Nickell: Well, it is
a bit of a responsibility. Every time you pick up the newspaper,
there are statements that the OBR has said this or that. That
is quite a heavy responsibility. We are just going to do the best
we can, and justify it robustly. That is all we can do really.
Chair: Thank you very much, Professor
Nickell. We will take a bit of time to consider things, and we
will be seeing your colleague in just a moment. Thank you very
much for the directness of your responses, which we found very
informative.
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