(Examination of Witnesses Questions 241-337)
Q241 Chair: Good
morning. This is the first session where you have come before
us having had a reasonable opportunity to work out your own methods
and, with a bit of time, to think through what you want to present
publicly. I would like to begin with an issue about process. I
noticed from your published document that you required all major
policy decisions to be received by you by 9 March, a full fortnight
before the Budget, and that this means that two major items that
were decided after that were not fully accommodated in the forecast.
Why did you require a fortnight?
Robert Chote: That
is the appropriate time horizon, I think, given the fact that
once you have an economic forecast, the Chancellor needs a stable
platform in terms of an economic forecast in order to reach final
views on the content of the fiscal package, and then once we have
an economic forecast, then there is the longer process of going
through the fiscal forecast, which is not simply a matter of hitting
a button on a spreadsheet. We have to send that set of determinants
out to departments and that takes a couple of days for them to
come back with the material from that. So we discussed with the
Treasury at the beginning of the whole process what would be an
appropriate time horizon that gave them the information they needed
with reasonable certainty, and good enough time for decisions,
and then would allow us to come up with the forecast at the end
of the day. They were happy with that; we set that out in terms
of the time horizon we would need—
Q242 Chair: The
fortnight schedule is their suggestion, is it?
Robert Chote: We
agreed it. We had a discussion at the beginning of the process
at what—because you know at that stage when particular data
are coming out so on some occasions you end up with particularly
important data coming very close to the final stage, some a bit
later, so you look at the calendar, see what seems an appropriate
set of time horizon, we explain that to the Treasury, we agree
that in advance and then I think it was quite important that having
set out that timetable, we should stick to it and be transparent.
Q243 Chair: What
I am trying to get at, just to be clear, is that the fortnight
period after which you were not prepared to take further changes,
was agreed by the Treasury—
Robert Chote: In
advance of the process, so six weeks out from the process, yes.
Q244 Chair: All
right. In working that out, did you look at how previous Budgets
had been put together?
Robert Chote: I
had not been through a previous Budget process in the same way;
Graham has probably had some experience of that time horizon.
Judging from the Treasury's reaction to that, I presume that was
fairly consistent.
Q245 Chair: But
the answer—it is a very long answer to a very simple question—to
that question is, "No" is it?
Robert Chote: I
have not been through a previous—
Chair: It is either yes
or no.
Robert Chote: I
have not been through the process before.
Q246 Chair: If
you have not taken a look at that, you did not ask for any information
on that question?
Robert Chote: In
terms of when we think that the answers can be put in, whether
Treasury felt that they needed to have a stable base, I presume
they were certainly drawing conclusions from their previous experience
and what requirements they would have there.
Q247 Chair: Yes,
but the answer is no, you did not ask how it had been done by
previous Administrations or in previous Budgets.
Robert Chote: I
did not go through previous processes, no.
Q248 Chair: Fine.
What will you do with this fortnightly schedule if there is a
major macroeconomic event that radically alters the likely structure
of the forecast within the fortnightly period?
Robert Chote: If
that is likely to show up in the form of a piece of data that
would come out on the calendar, then that is one of the things
we would take into account in future occasions on deciding what
the appropriate time horizon is. If you knew that you were going
to have a particular GDP number, for example, out of some particular—
Q249 Chair: I
am talking about an unexpected event.
Robert Chote: If
you have an unexpected event, we would look at that when the unexpected
event arises and say, "What adjustment can we make for this
in the appropriate time horizon?" but I think it would be
very important to be transparent about what we had done there
rather than to just claim that we had managed to put everything
together in the appropriate time.
Q250 Chair: In
the interests of transparency, it might be helpful if you tell
us when you were told about the two major tax changes that were
notified to you after the—
Robert Chote: On
the 16th and 17th that were the three—
Chair: Right. So basically
with a week to go?
Robert Chote: Yes.
Q251 Chair: Did
you ask whether historically the Treasury had been capable of
absorbing that and redoing the forecast in a week?
Robert Chote: I'm
sure I have—although I have not been through the process,
I am well aware that, I think, in previous Budgets there were
often significant decisions taken rather later in the process
than a week before the final announcement. How well that was integrated
into the final forecast is a matter for them.
Q252 Chair: I
think the Committee would like to see much more detail on any
decisions that have been notified to you late in future documentation,
please, and in particular we would like a substantive explanation
of why it is that you were unable, in this case, to accommodate
those two measures, or the big measures, which are corporate tax
and the fuel duty, even though you had a week to do so.
Robert Chote: Can
I just say I think one very important reason for that would be
that having set out this process and the timetable in advance,
one lesson that I think you drew, as well as we would have done
from the experience of the interim OBR in the early years—in
the early period—is that, having set out a timetable, it
is wise to stick to that and be transparent about it, and less
people misinterpret changes in the timetable.
Q253 Chair: It
is also wise to be flexible, don't you think? You do not want
to create a new huge bureaucracy here.
Robert Chote: No,
it is wise to be flexible. It is also wise to put in clear transparent
deadlines and stick to them when you have put them in place, I
think.
Q254 Chair: Can
I turn to the correspondence that I have had with you on behalf
on the Committee on asset sales and privatisation receipts? You
say there that to supply such numbers will leave us with the problem
of coming up with sensible estimates, but you have to come up
with sensible estimates for all sorts of unknowns or very difficult
issues to forecast, do you not?
Robert Chote: We
do. I am not sure it is in quite the same sense. You have the
combination of actually knowing what the timing of particular
sales is going to be and actually putting a value on the particular
asset that we are talking about, when it is often not clear in
what exact form that asset is going to be sold, so, yes there
are lots of difficult things that we have to estimate. I think
here the question is the clarity about the policy rather than
the uncertainty that surrounds the estimate as much as—
Q255 Chair: But
you are writing in zero for something that is very likely to have
a positive number, are you not?
Robert Chote: As
we said in the letter, there are offsetting effects in different
parts of the public finances if you are selling an asset that
brings in a stream of revenue. It could well be that the value
of the asset is equal to the present value of the future stream
of the revenue, for example. And so you could see often offsetting
effects there, but I think you do have to say, "Can we be
clear enough about what the policy is? Is this going to go ahead?"
and whether you can say what information there is available. So
I think in terms of where we can go forward from the information
that we have presented in the past, the two areas that I think
are most amenable to progress would be, firstly, setting out as
far as we can in advance how we think a particular type of asset
sale is likely to score, so to try to identify at least qualitatively
where it will show up in different parts of the public finances—
Q256 Chair: That
is not the question that I am really posing to you. I am posing
the principle of whether you should try to establish an indicative
number over the forecasting period, and I agree that there will
be pluses and minuses and various assumptions that you will need
to make in order to arrive at a number, but it does not strike
me that the uncertainty involved is any greater than it was, for
example, in the 1980s and 1990s when there was always an indicative
line for privatisation proceeds in the accounts.
Robert Chote: Hopefully,
we are trying to be more transparent about the way that we are
presenting these things nowadays, and I think actually requiring
some clarity in terms of the policy and the timing in which it
would have its effect is a sensible thing. I think the difficulty
of producing an aggregate estimate of where this is going to come
from in that we do not break it down into its individual components
and then attributing it that year by year, is that there is not
a strong enough evidence base to say that that is a sensible projection.
I think it would be misleading; it would be a bit un-transparent
if we were not prepared to explain where it was coming from, and
it would also be an open invitation to Ministers to make pronouncements
about the fact that they intend to sell something which subsequently
turns out not to be sold. The tote has been at the top of the
list for quite a long period of time and has not actually come
off the slipway yet.
Q257 Chair: None
of the concerns that you have expressed seem to have been insurmountable
in the past, and I would be grateful if you would take another
look at this issue. I would also be grateful if you make sure
that it is a subject that you look carefully at with respect to
your assessment to overall fiscal sustainability.
Robert Chote: I
think there is an interesting issue, because we have more emphasis
on the balance sheet side there, so it may be possible to look
more at the issue of where the valuations of these things appear.
I think Whole of Government Accounts will hopefully help us in
that when we get those.
Q258 Chair: In
our letter, we asked for you to make that first assessment for
the period at the end of this Parliament. Are you happy to do
that?
Robert Chote: Sorry,
so for—
Chair: This is a long
run fiscal sustainability assessment and the question is: where
should be the start date for your first forward-looking part of
that assessment? And I am suggesting that the opportunity—
Robert Chote: I
think the general approach for the whole long-term sustainability
report is that you take the forecast as we have it over the five
year period, and that is your jumping-off point on the grounds
that we know what policy is defined to be over that period, and
then you have to say—
Q259 Chair: It
is very hard work this morning. Your jumping-off point is clearly
going to be different, is it not, for the sustainability estimate
if it includes privatisation proceeds? Your jumping-off point
will not be the same as the forecast which is explicitly excluding
those numbers.
Robert Chote: I
am not sure by that stage we are going to know if and when these
things are going to be sold. What we may be able to do is to say
if you look at the value of these assets, as far as it is possible
to estimate, then there may be more information on that which,
obviously, feeds into the long-term sustainability report.
Q260 Chair: Yes.
So are we getting a commitment, in four years time, to have a
fiscal sustainability number as the starting off point that will
include privatisation proceeds?
Robert Chote: Those
privatisation proceeds where we are clear enough what the policy
is, that we can have essential—
Q261 Chair: That
is back to your letters, so the answer is that you have not made
up your mind.
Robert Chote: If
we can produce an estimate that is based on sufficient evidence
that we think is robust enough, then by all means, but I would
not want to make a commitment to that prior to having to worked
out whether we have the robust enough evidence for it.
Chair: We have not come
very far this morning so far.
Q262 Mr Mudie: I cannot
think I will improve matters, sir, but we will try. In terms of
unemployment and employment, I seem to see from your figures that
you have downgraded the private sector employment level and increased
the public sector employment level over the period.
Robert Chote: The
aggregate employment, the revision to the figures for employment
and unemployment, is essentially a reflection of what we have
done to the overall path of economic growth. We are more pessimistic
about growth in the short term and so therefore you have less
overall employment growth and a slightly worse picture for unemployment.
On the Government side, we have obviously taken into account the
latest data that we have had from ONS, the reclassification decisions
there, and at the moment we continue to have to use this top-down
approach, essentially trying to derive a path of general Government
employment from the overall pool of money available to spend on
it and assumptions about pay bills, so that is where that change
has come about.
Q263 Mr Mudie: I think
the Chairman was right. Let us try and put that into English,
and coming from me, that is something.
Robert Chote: Growth
is lower, unemployment is higher, and data suggests there are
more public sector employees.
Q264 Mr Mudie: Sorry,
say that again. "Unemployment is higher and there are more ..."
Finish that sentence off.
Graham Parker:
Data suggests there are slightly more Government employees.
Q265 Mr Mudie: And apart
from this business of the colleges coming into figures, there
are rumours that, certainly at Government level, the Departments
are not cutting as fast as, say, the local authorities. Is that
reflected in the figures?
Robert Chote: It
will not be reflected in the figures because they are a top-down
analysis based on the total amount of money spent in central government,
local authorities and the BBC. I think, hopefully, before long
it will be possible to supersede these sorts of forecasts by actual
estimates out of departments of how many people they are intending
to employ and presumably at some stage, before too long, the Cabinet
Office will be pulling that sort of data together.
Q266 Q27 Mr Mudie: That
is one of the questions. In the past, you have suggested something
about publishing specific workforce plans. Have you raised that
with the Treasury and have you had discussions with them?
Robert Chote: We
asked whether they—and that would be for them to do because
it would be pulling together data from Departments, so we said,
"Do we need to continue with this process or are you effectively
going to supersede it by having a full set of employment numbers
from Departments?" and they said that they were not in a
position to do that yet, and hence we have done another round
of this one.
Q267 Mr Mudie: I understand
the vagueness of that reply. Did they say they will do it? You
said they are not in a position to do it now. Are they going to
do it, and when?
Robert Chote: I
do not have an answer to that question.
Q268 Mr Mudie: Stephen
is looking restless. Is it Stephen? No, Graham looking restless
beside him. Do you know anything about this?
Graham Parker:
No. It is up to them. It is for them to answer that question.
Q269 Mr Mudie: Robert,
if you thought it was important and you have asked and you have
not received an answer, why not and what have you done about it
and how satisfied are you with it? If it is important and you
asked them, and months have passed and you have no response, come
on.
Robert Chote: The
Government has to decide when it believes that its own employment
plans are robust enough for them to publish, so I think you have
to say, "When are you—"
Mr Mudie: But you could
wait forever. That could be an excuse for doing nothing.
Robert Chote: And
in the meantime—
Q270 Mr Mudie: You have
the job of independent Office of Budget Responsibility; you cannot
have the Treasury deciding we cannot give you these figures because
we are unsure of them. "When will you be sure of them?"
"Well, we will tell you when we are." That is no way
to let them pull you around.
Robert Chote: We
continue to use this method for as long as we have to until the
Government is in a position to do that. But you have to ask them
to say, you know—
Q271 Mr Mudie: It would
be very helpful if you said to us that any help we can give in
pressurising the Treasury into getting their act together sooner
would help you do your job, we would be happy to do it.
Robert Chote: But
you will find a reference in the book, I think, for the desirability
of them actually publishing estimates like that so we do not have
to continue to—
Mr Mudie: Melvin used
to put little notes that he would use later to say that he had
told us about the impending crisis; it would be very much—
Robert Chote: I'm
happy for you to say if you—
Mr Mudie: The importance
of this is—
Robert Chote: If
you were able to encourage them to do that, I would be delighted.
Q272 Mr Mudie: Good,
I think that is an important part of your job. Now, the important
part in the figures is that we had very strong arguments last
year about the private sector were going to produce the jobs that
the public sector were losing so there would not be heavy unemployment
because they would switch over. The figures you have given suggest
that you have reduced your figure by 200,000 for the private sector.
You have kept the figure for the public sector level, but you
have indicated elsewhere in the report that there is movement
that you may not have picked up. We would suggest that, from personal
experience, the local authorities and the health service are cutting
faster. So the 400,000 may be, as was raised last year, wrong;
it is going up but the private sector's job creation is going
down. Is that now a worry to the basic strategy or is it just
a blip?
Robert Chote: As
I said, knowing the timing of exactly when the changes in general
Government employment are going to come along does, as you say,
depend on some bits of Government, presumably, deciding that they
want to get the job that they think will need to be done eventually
done relatively early and relatively later and you may be picking
up differences between local Government and other bits of Government
and how they do that. So one issue is how much of the data that
you have seen for the recent past showing public sector jobs going
relatively quickly—to what extent that is people doing the
job that our figures suggest is implied by the spending numbers
over the coming four years, earlier or whether that is in addition,
and that is something that we simply do not have the information
to base that on—
Q273 Mr Mudie: Are you
seeking that? Are you keeping track of local authority job losses?
Because it is starting this financial year. This Friday, all the
redundancy notices are going out, people are taking it now. Are
you keeping track of it?
Robert Chote: No,
we are not. We are looking at an aggregate forecast for employment,
which is driven from the approach we are taking on economic growth.
Q274 Mr Mudie: If the
Budget figures are different by more people being made unemployed
and redundant and the private sector are not picking those up,
that affects the Budget figures in a major way.
Robert Chote: The
overall level of employment is likely to be determined by the
overall level of demand in the economy, and that is reflected—the
make-up obviously does depend in part on what is going on in the
public sector, but we have a limited amount of information that
we can draw upon.
Q275 Mr Mudie: A last
question on youth unemployment. There is a suggestion, as happened
in the 1980s, that a long period of unemployment at the start
of a youngster's life, often coming out with different skills
and different education, sort of scars them for life and that
they see that as a way of life and we have lost generations since
the 1980s. Do you see any sign, do you have any fear of that in
the figures that that is going to happen again?
Robert Chote: It
is obviously a concern. At the moment the evidence on detachment
would suggest that the level of long-term unemployment, and the
level of long-term unemployment amongst relatively young people,
is lower than it was in the 1990s. But it clearly is a risk to
the forecast and when we produced our persistent low growth scenario
last time around you will recall that we had a different view
of the long-term rate of unemployment in that it reflects exactly
that sort of risk.
Q276 Mark Garnier: Good
morning. Can we turn to the housing market? There have obviously
been a number of measures that have been brought in with the budget
including first time buyer and also some of those planning rules.
Overall what impact do you think this Budget will have on the
residential housing market?
Robert Chote: I
think in the longer term the issue of the planning reform is the
item that has the potential greatest impact in the longer term
but it is not clear exactly how that will materialise and what
the effects will be. There is certainly plenty of evidence, people
have suggested, that you might expect benefits from planning reform,
not just in housing but also in retail distribution et cetera.
I think in terms of its—we haven't reflected that in the
projections for the housing market performance, what we have basically
done there is we take the independent forecasts for house prices
over the next couple of years, and in this occasion we are using
those forecasts for the CLG measure of house prices and then extrapolate
forward thereafter in terms of the average earnings. You might
expect assistance to first time buyers, for example, to do more
to push up on the demand side, but I don't know whether, Steve,
you're—
Stephen Nickell:
I think that there is an explicit piece of assistance to first
time buyers, but it's relatively modest so I don't imagine that
will have an overall very big impact on the housing market. I
mean, the fact is that the credit crunch is restricting mortgage
availability to first time buyers in a very serious way, as you
can see from the very large rise in deposits that are required,
and there doesn't seem to be much sign of that changing soon.
I would argue that the changes, so far, that have been announced
in the Budget will only have a relatively modest impact on the
prospects for the housing market.
Q277 Mark Garnier: You
have in your figures from 2012 and onwards the transactions jumping
by 20% to 13-14, 10% to 14-15, 5.2% 15-16. That is quite a sizeable
jump from a drop of 1.9% in 11-12 and 10-11. What are you basing
that on, or again is this just simply—
Robert Chote: It's
based on a view of in the long-term you get back to the level
of house price transactions implied by the average period for
which people occupy a house. At the moment you have housing transactions
considerably below that sort of level, so essentially we've taken
a judgment about over a number of years returning to that level.
Q278 Mark Garnier: So
this is suggested as a bit of a backlog that is going to come
through in those two years when it's 20%, essentially.
Robert Chote: Yes.
Q279 Mark Garnier: There
have been one or two commentators that have been talking about
the fact that the property market is still very high, and I think
you and I spoke about this in the past, and certainly some people
subscribe to the fact that it really is still high particularly
when you look at first time buyers coming into the market going
back 40 years or 30 years was early 20s and now it is late 30s.
Do you think there is a questionable moral issue, if you like,
with trying to help people into the housing market as first home
buyers at this high level? Or do you think those commentators
are wrong?
Stephen Nickell:
Do you think there's a—did you say "a moral"?
Mark Garnier: There is
one or two commentators in the press have suggested that it is
the wrong thing to do to try to be helping first time buyers at
the very high level. Do you think that is an unfair criticism?
Stephen Nickell:
I think you can see where people are coming from when it comes
to saying help first time buyers. The fact is that given the shortage
of housing—that is to say the low level of house building
relative to the rise in the number of households over the last
decade—simply helping first time buyers just raises the
demand for housing which will just be reflected in prices because
real help to first time buyers, that is to say allowing more first
time buyers to move into houses, can only happen if there are
more houses for them to move into. If there aren't any more houses
for them to move into the help for first time buyers equals rising
prices.
Q280 Mark Garnier: So
do you feel that there should be more help for the construction
industry be it the production of raw materials and constructors
as opposed to necessarily just having something like this to—
Stephen Nickell:
I think that I would go back to planning—in fact, I think
that the binding constraint over the last two decades has been
the planning constraint and that if the planning constraint can
be eased then I think that's the best prospect for house building
and therefore for the construction sector and in the long-term
that would be the best prospect for first time buyers because
then there will be more houses and then they have some chance
of moving into them.
Q281 Mark Garnier: On
that basis do you think the Government could have gone further
with the planning changes?
Stephen Nickell:
They produce a growth report and they have their eye on the planning
system and they rightly argue, the Treasury rightly argue, that
the planning system is holding back the construction sector and
maybe even productivity growth. On the other hand, of course,
this is—I mean, I hesitate to step into a political arena—obviously
a highly political activity because there are forces in the other
direction, forces of localism and so on. You don't need me to
tell you this, and so the eventual outcome is quite hard to perceive
at the present time.
Q282 Mark Garnier: That
is quite a political answer. So do you have an opinion on this?
Stephen Nickell:
Do I have an opinion?
Mark Garnier: One that's
actually coming to one side of the fence or another, I mean—
Stephen Nickell:
Are you asking me—should the OBR have an opinion on this
highly political subject.
Mark Garnier: Well, as
an economist.
Stephen Nickell:
As an economist. I'm more on the side of relaxing the planning
constraints. That would be my own—
Q283 Mark Garnier: So,
the Government could have done more?
Stephen Nickell:
Oh, the Government could have done more. Well let's see how the
proposals in the growth review actually pan out because we don't
know what the outcome is going to be at the moment.
Q284 Andrea Leadsom: Thank
you, Chairman. I would like to talk to you a little bit out inflation
because interestingly you seem to be rather in line with the more
laissez faire members of the Monetary Policy Committee suggesting,
I think, that inflation will sort itself out by 2013; you are
suggesting that it will be back at the central target of 2%. Can
you just talk me through what you think the kind of cost per inflationary
factors—commodity prices rising, the VAT rise plus the depreciation
of Sterling—what impact are those in aggregate having on
the public finances and how are they going to take us back to
the central 2% inflation rate by the middle of 2013?
Robert Chote: Shall
I start off with the prospects for inflation and then turn to
the prospects for the public finances? I guess I think our view
of inflation over the medium term partly reflects the fact that
we still see there being considerable spare capacity in the economy
and that will have an underlying downward effect on inflation.
There is also the fact that VAT, unless there's a policy change
we're not expecting, is not going to go up again and therefore
the increase in the price level as a result of that will drop
out of annual comparison so that pulls the rate down. We've made
the assumption that oil prices move in line with a futures curve
over the period of the forecast, and since the November forecast
you've seen the Sterling price jump by about £15 in the spot
price but by less if you go further out. We're assuming that food
prices, although higher, are not going to continue to rise and
therefore there's a persistent effect there. So taking all of
those factors together you would expect inflation to come back
down. There's clearly the possibility that the bad news on inflation
becomes incorporated in wage increases and that you end up with
greater persistence as a result of that and that's why we've included
the persistent high inflation scenario as one of the two alternatives
which basically says what would the impact be if that were to
persist.
That shows the contrast between the central forecast
and that scenario does point up one of the interesting ways in
which inflation is affecting the public finances. At the moment
the impact in the central forecast is a negative one because it's
dominated in large part by the impact on inflation on the cost
of social security bills because of benefit up-rating and on the
cost of index linked gilts. But because we're assuming it's not
incorporated into wage increases it's no pushing up the total
cash value of spending and incomes and therefore providing more
revenue there.
Q285 Andrea Leadsom: So
the big assumption is—
Robert Chote: But
the irony if inflation stays higher the impact on the public finances
actually looks less harmful over that period simply because you're
getting more revenue there. There may of course be very good other
reasons for not wanting that scenario to unfold.
Q286 Andrea Leadsom: Because
then you are making big assumptions on fuel prices not continuing
to exponentially rise, likewise food prices and you are also assuming
that earnings will not go up in line with this, what you believe
is a temporary inflation blip. So how much sensitivity analysis
have you done around those three assumptions not proving to be
true?
Robert Chote: Well,
that's what I was saying. We've done a sensitivity analysis in
the sense of saying, "What happens if inflation persists
at a higher level and what impact would that have?" and we've
spelt that out there.
I think in terms of the oil effect we do have, somewhere,
a reference to the direct effects of the increase in the oil price
we have had, which from memory is .4% on CPI from the increase
that we've seen since November, so you might expect that to be,
you know, you could scale that if there were to be another increase
of a similar proportion, but I'm not sure we included one for
food prices.
Q287 Andrea Leadsom:
And your expectations, your curve on the way inflation will right
itself back to the 2% does not assume any action on the part of
the MPC. You are assuming that base rates remain fixed, is that
correct?
Robert Chote: We're
assuming that monetary policy is in line with market expectations.
Q288 Andrea Leadsom: Which
is what particularly? You are assuming that interest rates are
not—the base rate does not rise.
Robert Chote: It
goes up. The interest rates go up with rates that the market is
expecting.
Q289 Andrea Leadsom: Sorry,
let me just be very clear, you are assuming the MPC is not going
to raise the base rate. Is that right?
Robert Chote: No,
we're assuming that—exactly, that's right. We're assuming
that it rises in line with the expectations of the financial market.
Not hugely.
Andrea Leadsom: Right.
Thank you.
Q290 Chuka Umunna: Before
I ask you about some of the risks can I just ask you a question
about your claimant count figures because I noticed that from
November to your latest figures claimant count has been revised
up by 50,000 this year, 120,000 next year and 130,000 the year
after. Can you just explain to us why you have revised them up?
Robert Chote: Well
the main reason is that it's an automatic consequence of the fact
that we're expecting a weaker profile for economic growth and
the level of activity. That reflects the evidence on weaker momentum
behind the economy coming into the end of last year and the impact
of inflation squeezing consumer spending and therefore squeezing
growth. So the main factor there is that you essentially have
is less growth around and as a consequence of less growth we see
unemployment peaking at higher level, otherwise we'd be—we
still basically have it going up for a bit in the early part of
this year and then started to come down.
Q291 Chuka Umunna: Thank
you I just wanted to check that I was not misreading something.
In your report you set out a few parameters and the effect you
think they will have in your forecast. So you talk about the size
of the output gap, the speed with which it will close, interest
rates on Government debt and so on. Where do you think the main
risks lie for the Government in meeting its fiscal target?
Robert Chote: Well
the biggest uncertainty is whether we have the amount of spare
capacity in the economy correct because essentially the amount
of spare capacity you have determines how far the economy can
grow in a sustainable way and therefore how much of the deficit
that we have at the moment will be soaked up naturally as the
economy recovers and how much, as it were, is left for policy
to deal with.
Q292 Chuka Umunna: And
if the Chancellor has to borrow more, what effect do you think
that is going to have on his ability to meet his fiscal target?
Robert Chote: Well
it would depend on why he has to borrow more. The targets he has
are the first one the fiscal mandate is set in cyclically adjusted
terms, so if he had to borrow more because he thought that the
economy was temporarily weakened but that it would make up that
lost ground that's not going to affect his ability to hit that
target. If he were to—if he was borrowing more and you thought
that that bad news was not going to be made up then that would
have a direct effect. In terms of the second supplementary target,
the difficulty there is that it's not a target for the level of
debt but just how much it moves between 14-15 and 15-16. The difficulty
with that target is it's really down to what's happening between
those two years. We see there being no room for manoeuvre, you'd
have to expect that the situation in 15-16 to be appreciably worse
relative to the position in 14-15 for that to be a particularly
binding constraint at this stage, but it's not certain by any
means.
Q293 Chuka Umunna: And
if he is in that situation, perhaps if I just direct this to Mr
Parker, because you seem to want to say something, what options
in that scenario would the Chancellor have to get back on track?
Graham Parker:
What, in the second scenario where it's structural borrowing?
It depends, you know, again on what was going to happen to the
economy, I guess. But clearly it's not for us to decide whether
he needs to raise taxes or reduce spending further. The only way
if he got higher structural borrowing would be to do one of those
things if he wants to meet the mandate.
Q294 Chuka Umunna: Perhaps
if I was to move on to what would happen—with you, Mr Nickell—if
growth came in lower than forecast? The Chancellor is being quite
clear that he will look to the MPC to stimulate growth in the
economy; he said that in the House of Commons on 29 November.
We obviously had the MPC in front of us a couple
of weeks ago and the message I had from the evidence that they
gave was that if inflation is as per their central projection
for the next year their ability to further make some monetary
policy is going to be quite restricted. Now, obviously on the
fiscal side the automatic stabilisers will kick in, but what other
options would there be in that scenario where you have a constrained
MPC, Mr Nickell, to stimulate growth in the economy if it is more
sluggish than we think it may be now with your downgraded growth
forecast?
Stephen Nickell:
That's a very important question. Can I just go back to inflation
and then come back to your question? I think the biggest risk
to this forecast, and in some sense the biggest risk to the economy,
is if oil prices and food prices, but particularly oil prices
keep rising faster than the average rate of inflation because,
as you know, embedded in our forecast is the prediction of the
forward market for oil prices, which is relatively flat and viewed
somewhat downward moving. So if the oil prices continue to move
up then inflation will be higher in our forecast and, under the
assumption—which I think is reasonable—that wages
don't adjust to this, real wages will fall and consumption will
fall and growth will be lower. That in some senses is the worst
of all possible worlds because we have higher inflation and lower
growth as a consequence of this which means that the difficulties
facing the MPC are of a very high order—
Q295 Chuka Umunna: Particularly
what's going on in the Middle East, I suppose?
Stephen Nickell:
One can think of any number of scenarios as to why the oil price
might continue to rise faster than was expected and then the MPC
is in a very tricky position because the inflation forecast is
higher and it's not a position I would like to be in. So the question,
"What should be the policy response under those circumstances?"
is one which luckily I don't have to answer.
Q296 Chuka Umunna: That
was very skilfully done, Mr Nickell, but I am actually asking
you the question and it would be nice to have an answer. And I
suppose I'm not necessarily asking you to say exactly what the
Chancellor should do, but what I am asking you is: what are the
options in that scenario where you have a constrained MPC and
you have growth coming in lower than forecast and my constituents
and the constituents of everybody around the table are paying
the price?
Clearly one must hope that the Chancellor would not
sit on his hands, so what I am asking you is what are his options
in that scenario where the MPC can't do anything to stimulate
demand in the economy? Okay, maybe the automatic stabilisers will
kick in; what are the other options for him to stimulate growth
and what other contingency planning can be provided for?
Stephen Nickell:
Well the options are clearly he can cut taxes or raise expenditure
and he could cut taxes in such a way as to try and offset the
increasing oil price, but that would be at the cost of his fiscal
plans to some extent, plainly.
Q297 Chuka Umunna: This
is why it's a difficult decision but of course—
Stephen Nickell:
And one luckily I don't have to make.
Chuka Umunna: —could
change his fiscal plans could he not, Mr Nickell?
Stephen Nickell:
That's his responsibility. I mean, of course he could.
Q298 Michael Fallon: Professor
Nickell, in Chapter Five you sketch out a weak Euro area scenario
and you suggest that the overall effect of it would be negligible
on borrowing: why should we not worry about problems in the eurozone?
Stephen Nickell:
The weak Euro scenario has—my reading of it—
Michael Fallon: Paragraph
five, 42.
Stephen Nickell:
Oh right, I was looking at table three.
Michael Fallon: Page 164.
Stephen Nickell:
Yes, now are you asking why should we worry about it?
Q299 Michael Fallon: You
said the overall impact is small.
Stephen Nickell:
On net borrowing is small.
Michael Fallon: Yes.
Stephen Nickell:
Well that doesn't mean that the overall impact—we don't
just worry about net borrowing, we worry about the people in this
country and as far as I can see they would be, initially at least,
somewhat worse off because of the fall in demand. But further
out, of course, they will actually benefit because real wages
will be higher than otherwise would be the case. That's basically
because our exchange rate rises relative to the eurozone so of
course eurozone goods become cheaper which is helpful.
Q300 Michael Fallon: That
implies the recovery is not particularly reliant on exports to
the eurozone. Is not, doesn't it?
Stephen Nickell:
Well, yes, but what you lose on one side in terms of exports to
the eurozone you gain on the other side in the longer term because
of increased consumption. So you get less of the rebalancing that
is currently in our forecast but in the longer term the household
consumption growth compensates.
Q301 Michael Fallon: You
don't think that if the eurozone continues to weaken there would,
in fact then, be lower consumer confidence and thus in the end
lower consumption?
Stephen Nickell:
Well I guess that consumer confidence is one thing, but real incomes
tend to trump consumer confidence and if real incomes improve
that has a more direct impact on consumption than consumer confidence,
I would argue.
Q302 Michael Fallon: And
what happens if the problems in the Zone get worse this year and
next; what's the impact on the public finances of the deterioration
of the Zone?
Stephen Nickell:
Impact on the public finances—
Michael Fallon: Well,
that is what you deal with.
Stephen Nickell:
Sorry?
Michael Fallon: That is
what you're responsible for.
Stephen Nickell:
No, we're responsible for forecasting the economy. The impact
on the public finances is a very little change because there are
changes in—let me just—I have to work this out now.
Inflation is weaker so that will have various offsetting effects
on the public finances, consumption is higher so VAT will go up.
I mean, there are, sort of, pluses and minuses in the public finances
and the overall impact is relatively modest.
Q303 Michael Fallon: If
there is a crisis in the eurozone what more could Government do
to stimulate growth here to offset it?
Stephen Nickell:
What more could the Government do? Aside from any response of
the MPC?
Michael Fallon: Yes, what
could the Government do to strengthen growth here if we see a
serious deterioration in the eurozone?
Stephen Nickell:
I wouldn't expect the Government to adjust its fiscal or other
policies in any serious way.
Q304 Stewart Hosie: Robert,
in the central forecast you have a positive contribution to GDP
growth from net trade of 0.7%, 0.6% and 0.5% over the next five
years. In the weak Euro scenario that goes to 0.2, 0.3, 0.1, 0.1,
0.1 for the next five years. Convince me why I should believe
there's a positive contribution to GDP growth from net trade in
either scenario, given what we have witnessed in terms of balance
of trade over the last three, four, five years?
Robert Chote:
Well, I think you can look at the contribution that you had the
last time we had a significant depreciation of the exchange rate
in the 1990s; and we're assuming a contribution that is not as
dramatic per percentage point change in the exchange rate than
we had then. I think the fact that goods export performance has
been relatively positive coming out of last year between November
and now while trade growth has been stronger than we've anticipated
then it's reflected in things like the IMF forecast. That seems
a reasonable view to take looking forward on the basis of the
history and the basis of what we've seen in the recent past.
If you look at the data over the last couple of quarters,
the picture is slightly muddied by the aircraft imports that we've
highlighted in the report, but I think, as I say, a combination
of history and the rather greater momentum and news that we've
had in recent data, I don't think it's unreasonable. In the contrast
between the central scenario and the Euro scenario, as Steve said,
you're essentially talking about a shift in the balance in the
sense that if you're having weaker external demand you would assume
that the Bank of England, other things being equal, is going to
want to see more domestic demand and so you do have less of a
contribution there. The difficulty would come obviously if you
arrived at the stage where the Bank of England was constrained
and being unable to compensate for that, but with the path of
interest rates heading where they are, we're away from that yet.
Q305 Stewart Hosie:
You are talking about the history of this, but let's look at the
last four or five years. The sterling exchange rate index has
a 23-and-a-bit% fall since the peak in July 2007. There has been
a four-year fall peak to trough against the euro, and there was
a three-year fall against the dollar. We keep being told, "Ah,
the depreciation will see exports begin to boom". Exports
did not boom. In 2010, we saw that we did not move forward from
the £82 billion deficit in the trade in goods. We managed
to create a colossal £97 billion deficit in the trade in
goods and a £46 billion deficit in goods and services. There
was a 0.3% negative contribution in Q4 last year. I am not seeing
any evidence at all that the depreciation, which has been huge
over a prolonged period, has delivered the positive contribution
to GDP growth that people expect.
Robert Chote: The
history of the past does come with a lag. Steve may be able to
talk about that. The other thing you have to bear in mind is that
in terms of a net trade contribution, you are looking at both
the imports and the exports, so we also have a weaker forecast
for consumption and consumer spending going forward, which is
likely to reduce the amount of imports you have as well, so you
have movement on both sides of the account there. Steve, do you
want to say anything the fact that we did see a response to the
lower exchange rate the last time that this happened but it did
not come to anything?
Stephen Nickell:
Yes. Responses to changes in the exchange rate take quite some
time to come through. Back in the mid-1990s, they did come through
in the end. The surveys and so on are suggesting that there is
quite a lot of strength in exports coming up, and furthermore,
this year we have had a great deal of restocking, which is very
import-intensive. That will fade away. This is our best judgement
as to the impact of the exchange rate fall, but of course, as
with many of these things, there is a good deal of uncertainty
about this. I think you may be right to be ever so slightly sceptical,
because people have promised this sort of thing in the past.
Stewart Hosie: I am considerably
sceptical, not least because one of you fine gentlemen gave me
the same answer when I asked you this question last year. I understand
there is a lag, but the reason I gave the SERI figures is because
this is a four-year, near-quarter depreciation against the major
countries to which we export. There comes a time when we no longer
have a lag we are waiting on or a catch-up we are waiting on,
but a structural problem, so I will remain suspicious, but can
I ask that you look at this? All the evidence over the last four
years is that we have not benefited, given the huge increase in
the trade deficit.
Q306 John Thurso:
This is a process question. What notice did you have of the changes
to the oil and gas regime, i.e. the supplementary charge, and
to fuel tax?
Robert Chote: We
had some of the fuel duty changed bar the 1p reduction, which
we certainly knew about before the deadline we were talking about.
I cannot remember precisely when we were given that. It was the
additional 1p cut that was gaining beyond the deadline.
Q307 John Thurso:
Let me get this straight. The two-week deadline: did you know
about the cancellation of the accelerator?
Robert Chote: Yes,
that is right. It was the additional 1p, which is about £450
million worth of the reduction.
Q308 John Thurso:
Did you know before the two-week time limit about the changes
to the tax regime for the supplementary level?
Robert Chote: Yes.
John Thurso: So that was
all done two weeks ahead.
Robert Chote: Yes.
Q309 John Thurso:
What estimate, therefore, have you been able to make of the impact
of the changes to the oil and gas regime?
Robert Chote: The
costing document: we are assuming there is no significant effect
on the investment and production profile of that change. It should
be said that there is quite a lot of change in the expected profile
of North Sea activity between the November and March forecasts
because there is new survey data from DECC as to the research
and development plans and capital expenditure plans over that
period, so relative to those, we thought the changes to the tax
change would be relatively modest.
Q310 John Thurso:
There are two areas in which I would be interested where you have
looked in this. You have just started to address one, which is
investment going forward. Today's headline in that great newspaper,
The Preston Journal, is that Statoil have cancelled their
forward investment plans. I understand also that Centrica have
put a moratorium on all future investment in gas until they have
been able to work through the changes. Bearing in mind that the
cost of gas is actually well below the stipulated $75-dollar-per-barrel
limit, being around the mid-50s, the two questions are: how did
you test and what have you seen as the Treasury's test on investment
overall, and secondly, on the differential effect between oil
and gas?
Graham Parker:
We did talk to Treasury about this, but certainly, on oil, the
conclusion we reached on the high oil prices was that this is
still very much a profits tax, so it is just increasing the Government's
share of the profit on the oil production. Because of the high
oil prices we are forecasting, we assume that the companies would
still want to go ahead, on that basis.
Q311 John Thurso:
Are you aware of the considerable difference between the oil price
and the gas price, and the volume of profit that comes out of
the North Sea that is gas related? What studies did you do on
the gas price?
Graham Parker:
Yes. The gas prices are quite variable. The prices from different
fields vary quite a lot. Some fields are determined by the spot
price of gas, and others have it written into their contracts.
We thought that there may be some effects. We did not think it
would have that much of a significant effect on the forecast period,
because it is still a profit tax.
Q312 John Thurso:
So, the assumption that has been made in forward forecasting is
that as far as the oil price goes, there is sufficient profit
and they are still making more money, so they will go ahead. What
about the gas price?
Graham Parker:
If they are making a profit, they would still go ahead, but clearly,
there is more risk there. I should point out that the main effect
of a reduction in the investment would be an increase in tax take
over the forecast period. There is quite a lag between the reduction
in investment and the reduction in production.
Q313 John Thurso:
Yes, but if there is a rapid decrease in investment activity,
there is a rapid decrease in the economy of the second-largest
growth area of the United Kingdom, which may or may not be something
that was taken into account. The other point on gas price is that
this will presumably feed directly through into domestic inflation
and domestic gas prices.
Graham Parker:
I guess there is more likelihood of it affecting gas prices than
oil prices, yes.
Q314 John Thurso:
It seems to me that they are two very distinctly different sets
of calculations, and therefore, what I am wondering on the process
is whether either you or the Treasury had sufficient time to do
a proper piece of work on the impact that this is likely to have.
Graham Parker:
I certainly think we would have liked more time to be able to
discuss it more widely, and it is probably something we should
look at in our work-up. To do this properly, you do have to do
a thorough analysis on an investment, project-by-project basis.
Q315 John Thurso:
If you look at your box 4.1 and some of the forecasts and so forth
that are made in there, you do say the impact on the economy is
highly uncertain, as are the projections of future North Sea oil
production, but clearly, if future Chancellors are going to be
making these kinds of decisions, we really need to know a very
great deal more. Is that something you feel the OBR should be
taking forward?
Robert Chote: We
will get to know more. Certainly, when we get to the next forecast
round, DECC will have much more robust data on which to view the
anecdotal talk—as you say—of what is being reported
in the newspapers at the moment and whether that is actually showing
up in what they are reporting as a long-term profile. There has
been quite a lot of change in that survey since November anyway,
so we will certainly keep a very close eye on that.
Q316 Chair: Have
you done a full rerun of the economic and fiscal forecast to take
account of all these things that came to you too late, where you
did not have sufficient time?
Robert Chote: No.
The main impact that you would have seen would have been the inflation
impact from fuel—
Chair: Was the answer
yes or no?
Robert Chote: No.
Q317 Chair: So,
we do not know whether your judgement that to have done this work
could have led you into publishing something that would have been
inaccurate or misleading is correct.
Robert Chote: No,
but we are confident, given the nature of the changes, that the
effect would not have been material.
Q318 John Mann:
In your labour market statistics, there is nothing about who the
new jobs are; for example, how many are migrant workers. Can we
in the general public expect to see that in future reports?
Robert Chote: It
is not something that falls within our remit in terms of the impact
on the public finances. No.
Q319 John Mann:
It is an important factor to know who the new jobs are and where
they have come from, because that affects both economic and social
policy. If you are predicting 1.1 million new jobs, and 700,000
are new migrant workers, that does not impact on the economy.
If they are not migrant workers and it is the under-employed or
unemployed returning to work, that has a huge impact. We need
to know that, so why has that not been included in your analysis?
Robert Chote: The
experts who came before you on Friday were saying that given,
for example, the fact that you have such large gross flows in
and out of employment and unemployment, giving an analysis that
would say, "Do these new jobs go to migrant workers?"
is something that would be beyond our remit and is a rather different
category of work.
Q320 John Mann:
In terms of output gaps, such as housing supply and where people
can go to establish communities and language barriers, they are
fundamental issues, and we cannot have a handle on the community—I
do not see how you can—if that is not part of the statistics
that you provide.
Robert Chote: We
are making an assumption on net migration in terms of its impact
on overall labour supply. That is within the forecast, and we
look at that to see what the impact of recent data is, the policy
and so on—
John Mann: Which is well-hidden
in the forecast.
Robert Chote: —and
reaching a judgement, we are assuming net migration of 140,000
per year on average over this period; that broader structure of
the labour market analysis.
Q321 John Mann:
That is well-hidden, and whether that has been met or not is a
key economic factor. If the new jobs being created are in and
around London, and young migrant workers from abroad as opposed
to 40- to 50-year-old public servants in the North, that is a
major factor that policymakers need to know. What is the point
of the OBR if you are not building in that kind of analysis and
forecasting on from that?
Robert Chote: All
the points you raised there about access to housing and the impact
on public services are very important parts of public policy analysis.
In terms of the remit that we have been given, it is not central
to that, but clearly, those sorts of questions would be ones the
policymakers responsible for those areas will be looking at.
Q322 John Mann:
Are you saying that the growth of the labour market is not in
your remit? If 700,000 people enter the labour market net from
abroad, that is fundamental to the labour market. If it is half
that number, that is fundamental. It is fundamental to growth
as well.
Robert Chote: We
are taking into account the net migration change. I will locate
where it is pointed out. That is underlying our view of trend
growth in the long term.
Q323 John Mann:
I am sure some of us, perhaps all, will be looking for that analysis
in future reports to see what is happening and what the implications
are. Can I come to a second issue? You did your first report in
November. For that quarter, you had growth significantly wrong.
Why?
Robert Chote: A
combination of factors: one, the snowfall, which the ONS estimates
to have taken half a percent of GDP off. The striking thing, though,
was that once you take that factor out, it was still a lot weaker
than everybody was expecting. The figures out today have now revised
the fall to be smaller than it was previously estimated—0.5%—so
we are back to where we started on that. I think, there, if you
are looking—
John Mann: Yes, but you
gave a rosy scenario in November. During the snow, you gave a
rosy scenario for that quarter.
Robert Chote: And
as I say, the striking thing was not so much the impact of the
snow but the weakness of the underlying path, and I think what
we have tried to do here is spell out, looking back to the figures
from the middle part of last year, what the underlying path has
been. If you take into account not just the snow but the construction
data that has been particularly erratic, and also the anticipated
effect of VAT, what you basically find is a slowing in this underlying
profile from the middle part of last year through towards the
end of last year. We are now assuming that that picks up during
the course of the coming year, but I am not going to put my hand
on my heart and say I can forecast quarterly growth.
Q324 John Mann:
No, but it is the process, and whether the processes you are using
and the assumptions built in are valid that is the critical issue.
If, say, in the first quarter of this year you find that your
assumptions are again too optimistic and growth comes in below
what you predict, are you going to make a significant analysis
of why you have been too optimistic, so that we can see the processes
gone through and how you are correcting those processes in order
to have confidence of the impartiality and the potential accuracy
of future projections?
Robert Chote: Absolutely,
and as I say, we put in considerable effort in terms of disaggregating
the numbers, looking back, and trying to explain this pattern
over the past year. There is clearly enormous uncertainty now
as to what the pattern is over this period, how much of this was
in fact snow, whether the ONS was right about that, and how much
of a rebound you will see, and that will affect forecasts going
forward.
Q325 John Mann:
You will appreciate that you have some fairly optimistic assumptions
on growth going into future years, and with real wages falling
and with inflation increasing at the same time and with rising
unemployment, we want to be certain that you are not projecting
too glossy a scenario into the future for growth, and one that
is unrealistic. Therefore, if you get it wrong again in the same
direction, would you not agree with me that it is particular important
that your next report will be analysing why you got it wrong?
Robert Chote: It
is particularly important whether we get it wrong or we get it
right. We might get the number right, but we might have been wrong
about the underlying reasons for why it happened, and that is
just as important to explain. The overall forecast for 2011 growth
is a little more pessimistic than the independent average at the
moment, but in terms of that exact quarterly profile, yes, there
is enormous uncertainty and we will certainly endeavour to explain
why it has turned out as it has.
Q326 Chair: Would
you agree, Robert, that it is inherent in forecasting that forecasters
in this field are always wrong?
Robert Chote: Yes.
As I say, the probability of a forecast being wrong is roughly
100%.
Q327 Chair: Exactly.
Would you also agree that one of your duties is to explain to
the public what a forecast really is, both its scope and particularly
its limits, which are considerable?
Robert Chote: Absolutely.
Chair: I hope you will
keep doing it.
Q328 Mr Love:
Taking on board all of those points about uncertainty, have you
been surprised by the mildly controversial nature of the way that
the forecasting industry has received your report, particularly
in relation to meeting the fiscal mandate? Have you been surprised
by that? A number of forecasters have suggested you will not meet
the fiscal mandate; there are others that are concerned about
your growth figures for later years. There are others that say
things the mix of consumer expenditure and so forth. I just wonder
whether that surprised you, or do you think your scenario planning
answered those questions?
Robert Chote: I
am certainly not surprised that there is a wide range of different
view on those issues, and we try to explain that in more detail
in the report and set out the diversity of those views. Yes, that
is exactly why we have the scenario analysis for things like the
size of the output gap, so we have made an assumption that it
is 3%. That is our best guess. It does not look unreasonable by
the range of others, but it would be foolish to assume that that
is correct. We need to present the implications for the fiscal
objectives, i.e. what if that number is wrong in one direction
or another? All the forecasts, as the Chairman said, are bound
to be wrong, but it is also a good way of showing where the errors
are most likely to affect the judgement that you make about the
eventual chances of meeting the mandate. There, it is the size
of spare capacity, for example, more than the interest rates on
Government debt. It is partly a reflection of that that we have
relatively long maturity of debt, so that is not as important
in the longer term, but it enables you to scale, somewhat, what
you should be more or less worried about.
Q329 Mr Love:
Because of the particular uncertainty, the IFS in its Green Budget
suggested, and I quote, that "The Chancellor should have
alternative plans available". How sympathetic are you to
that idea?
Robert Chote: I
am sure that any Government will want to think about its contingency
planning very carefully at all times, but as you know, you and
your colleagues in Parliament have instructed us not to look at
alternative policy paths, so at the risk of being locked up, I
had better not go too far in that direction.
Q330 Mr Love:
Your report leaves trend growth unchanged for the year 2013 onwards.
Does that mean that you believe that the proposals contained in
the growth plan will have no impact on trend growth?
Robert Chote: I
think the short answer is that we do not know until you see exactly
how they were implemented. Even if you were clear about that,
in areas like planning reform—there are people who have
looked at that in detail, and we have cited some of the academic
studies—it is not obvious what the size of the impact would
be. On planning reform, as Steve mentioned, the tensions between
presumption towards development and localism could affect that.
Our view is that, stepping back, the evidence is not strong enough
for us to say, "We are now confident that past trends are
no longer the best guide to the potential growth of the economy
in the longer term".
Q331 Mr Love:
Does that mean that the Treasury did not offer any evidence when
they gave you the growth plan, or is that—
Robert Chote: The
Treasury put us under no pressure to increase our trend growth
estimate on the basis of the information they presented to us,
so it is not as though we were pushing back against a request
that we raise the trend estimate.
Q332 Mr Love:
When we had the forecasters in front of us last week, they expressed
some scepticism about the ability to influence trend growth in
the medium to longer term. Perhaps you, Mr Nickell, could respond
to that. What is your view about how much we really can influence
medium to longer term trend growth?
Stephen Nickell:
History seems to suggest that it is very difficult, in the sense
that since the war, the productivity growth in the UK on trend
has been pretty stable. However, I think that you may be able
to increase growth rates in productivity over some period—not
necessarily forever—by changing policies, and there has
been some evidence that some of the structural changes that have
occurred in Britain in the last 40 years have indeed impacted
on the rate of growth for a period of time, i.e. five to ten years.
Changing the rate of growth forever is a pretty tall order.
Q333 Mr Love:
Can I come back to you, Mr Chote? There has been quite a lot of
scepticism expressed about enterprise zones. You have already
commented on the difficulties of planning reform; of course, the
devil is in the detail. Are there any other policies in the growth
plan that you suggest would merit serious consideration to improve
productivity in future years?
Robert Chote: You
mentioned enterprise zones specifically. In terms of enterprise
zones, I think there is a question about whether your objective
with that is a fundamentally distributional one, i.e. you are
trying to shift economic activity from one part of the country
to another. Maybe you want to shift it to areas more likely to
be affected by the public sector job reductions, for example.
I think you would probably look at that as something that is more
about changing the distribution of activity rather than an overall
boost to growth. You could, if you had sufficiently strong Silicon
Valley agglomeration effects. I guess the net effect would be
greater. Given the amount of money that has been spent in that
area, I would not cite that as a hugely important one.
Simplification of the tax system is something which,
again, it is very hard to estimate the exact impact of. There
is potential for—if not a long-term increase in the trend
growth rate—an improvement over time if you were to come
up with a simpler tax system, but again, as I say, judging the
magnitude there is not easy.
Q334 Mr Love:
Simplification, one understands, would be of great benefit, but
some of the recommendations, particularly the anti-avoidance measures,
are likely to complicate things by taking away from the manual,
but they are actually adding to it at the same time. Are we still
facing in the right direction?
Robert Chote: They
have made statements about wanting to look at the income tax and
national insurance system. I did not see the evidence that my
successor gave you, but I presume you brought that issue up with
him. We have said in the past that that is desirable. How much
changing the administration of the system as distinct from some
of the broader parameters delivers you all the benefits that you
might think out of that is debateable, but there is certainly
scope for good things.
You are right about the avoidance. That, by
its nature, tends to be chasing the problems where you find them,
and as the costings assume, you tend to put in an attrition there.
You assume that you close one hole as people gradually open others.
Q335 Chair: Our
job is to audit your independence, and I think we should ask you
one important question: were you put under any pressure from the
Treasury to move in any direction in this forecast other than
the one you wanted?
Robert Chote: I
am pleased to report not.
Q336 Chair: Did
you get full co-operation from the Treasury in the construction
of this forecast?
Robert Chote: Yes.
Q337 Chair: You
will understand, of course, that the counterpart to your independence
that is laid down is statute is that, as we explained in our report
on this prior to the Act being published as a bill, we expect
to see flexibility in responding to reasonable requests from the
Treasury and from us, and I hope you will bear that in mind with
respect to some of the remarks that have been made today.
Robert Chote: You
may not have liked the answer that I gave on the asset sales,
but I hope you will appreciate that we did look at that seriously
and that you will understand some of the concerns we have about
moving forward, desirable as that is.
Chair: There were three
or four issues of this type that have been raised today, of which
that is one. Thank you very much indeed.
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