UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 897-iii

HOuse of Commons

Oral Evidence

Taken before the

Treasury Committee

Budget 2011

Tuesday 29 March 2011

Robert Chote, Stephen Nickell and Graham Parker

Dave Ramsden, Edward Troup and Peter Schofield

Evidence heard in Public Questions 241 - 416

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Treasury Committee

on Tuesday 29 March 2011

Members present:

Mr Andrew Tyrie (Chair)

Michael Fallon

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Mr George Mudie

John Thurso

Mr Chuka Umunna

________________

Examination of Witnesses

Witnesses: Robert Chote, Chairman, Office for Budget Responsibility, Stephen Nickell, Member of the Budget Responsibility Committee, Office for Budget Responsibility, and Graham Parker, Member of the Office for Budget Responsibility Committee, Office for Budget Responsibility gave evidence.

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 required to 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 exactly, yes.

Q244 Chair: All right. In working 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 denouement. 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. It 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 the central 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 restive. Is it Stephen? No, Graham looking restive 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 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 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 Government 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 AT 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 event 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 guilt. 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 sent 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 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-5.1-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 this year through towards the end of this 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 Thurso: 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, 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 was 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.

Examination of Witnesses

Witnesses: Dave Ramsden, Chief Economic Advisor, Edward Troup, Managing Director, Budget, Tax and Welfare, and Peter Schofield, Director, Enterprise and Growth Unit, HM Treasury gave evidence.

Q338 Chair: Thank you very much for coming for us this morning. Perhaps I could begin with a fairly straightforward question. Do you think that the weak fourth quarter GDP figure represented a weaker outlook for the UK economy, or do you accept that it was the consequence of external shocks?

Dave Ramsden: Thank you, Chair. I think the OBR had done a pretty detailed analysis of the fourth quarter. I think it was quite useful in terms of trying to distinguish between what clearly were very severe effects from snow, construction, and indeed, strikingly in the ONS data on services, also trying to look at the other factors at play. In Q4, for example, they flag up that a lot of aircraft imports were brought forward because of a change to the VAT system. Their conclusion is that the underlying growth rate in Q4 was less than they had been expecting. That seems to me to be a reasonable place to be at this point, based on the data we have, and we have new data on Q4 this morning. We have a lot of new data from the ONS. I think we will need to keep that assessment of Q4, and then Q1, which we will not know about until the end of April, under review. In a sense, if you go back through the history of the OBR forecasts, and you go back to the forecast they started with when Alan Budd was Chair last June, they had a very smooth path for growth through last year. They expected it to be about 0.6 or so per quarter. Q2 was much stronger than that. Q3 was closer to that; Q4 was weaker, and that kind of choppiness in the actual growth path was a characteristic of the early 1990s recovery as well. I think Q4, from the OBR’s analysis, was weaker than they had been forecasting, but I do not think we will have complete picture until much later in this year, when we can look at Q1 and then Q2.

Q339 Chair: Do you think measures of the output gap are worth much?

Dave Ramsden: I do, actually. When I say "measures", I think it is really important to have an analytical approach that enables you to work out how much of borrowing of any point in time and prospectively, and indeed, over the past, is cyclical and how much is structural. I think the history of the UK, particularly in the late 1980s and early 1990s was a time when what was a cyclical improvement in the economy was taken to be structural, and that led to the problems that the UK public finances had in the early 1990s. That has always been a very strong episode for me.

Q340 Chair: Why did you pick the 1980s and early 1990s rather than the recent example we have just had of it?

Dave Ramsden: Maybe it was too much context, but it was on the back of that experience that we in the Treasury tried to develop an approach that distinguished between structural and cyclical influences on the public finances, because that is what you want. You can either want it for monetary policy or you can want it for setting fiscal policy. We are interested in fiscal policy. The output gap is the best whole-economy measure for determining the degree of spare capacity, but that does not mean it is the best we have at present. We published a working paper a couple of years ago that said that even the output gap did not take sufficient account, for example, of the credit cycle: how reliant the UK has been on financial services or on housing, so I think there is always scope to augment it.

What I think is really important in the UK context throughout the last two or three years really-this is not just about the current plans-is that the UK recognised very early on that the crisis was going to have a structural impact on the UK economy and on the UK public finances, which is something that I have talked to this Committee about in the past. There is still not much recognition of that, for example, in the United States, where this is seen as very much still a cyclical event, and I think that has framed successive Governments, and both the previous Government’s and this Government’s approach to thinking about what the fiscal response needs to be. If the output gap is not as big as it would otherwise be because some structural output has been lost, that means that the structural deficit-other things equal-is a bigger component of the overall deficit. That structural deficit needs to be addressed through discretionary measures, such as were announced last year and have been reinforced by this budget. I do think it is useful.

Q341 Chair: It is useful if we can have a number. The question is: are the numbers that we get from the work done on it of much value? That was my question.

Dave Ramsden: I was trying to give you a slightly deeper answer, and I am sorry if I went on a bit. I think the numbers are useful, because it is not as if the OBR has a methodology or an estimate that means that it is way out of line with outside forecasters. If it said that the output gap was, say, 6 or 7% at present, that would be beyond the extremes of the distribution. If it said that the output gap was almost zero, so that the whole deficit at present was structural, that would also be outside the range. Where it is, at 4%-

Q342 Chair: I do not want to prolong this, but forecasting is like markets, and they move together, so on the whole, that will not tell us very much either. The question is-

Dave Ramsden: I disagree with that.

Q343 Chair: I will put question one last time to you. The question is whether the techniques used to measure the output gap in light of the experience we have had need to be looked at with a due sense of humility.

Dave Ramsden: I would certainly agree with your emphasis on humility in terms of the way we analyse these things. I have already mentioned a working paper the Treasury did. When the OBR comes back to look at cyclical adjustment, I think it will want to look at how you take account of the credit cycle. I think their present approach, which is actually an enhancement of work we were doing in the Treasury, where they look at all the latest survey indicators, gives them the 3% estimate for 2010 Q3. Then, looking at the latest developments, they conclude the current output gap is 4%. I think that that is as good as we can reasonably expect at present as a way of framing fiscal policy decisions, but your point about humility is a good one. We should be striving to improve our techniques.

Q344 Chair: I was not asking you whether you were doing your best. I was asking you whether your best was of much value. It is not your fault. I was asking that question; I have had three or four goes.

Dave Ramsden: I think the OBR is doing its best and I think it is of real value in analysing fiscal policy and framing fiscal policy decisions.

Q345 Michael Fallon: Mr Ramsden, the first buyer scheme to help 10,000 first-time home buyers: what would be the impact on the housing market?

Dave Ramsden: I think we would hope that it will encourage transactions, and then together with the wider policies that we have announced in the Plan for Growth and elsewhere, it will help to free up the supply side. Together, when you look at the whole package, it can lead to a higher supply/higher demand equilibrium in the housing market.

Q346 Michael Fallon: I want to come to the planning measures in a moment, but have you measured the number of transactions you think will be increased as a result of the first buyer scheme?

Dave Ramsden: I do not know if we have a detailed estimate.

Peter Schofield: Remember, the first buyer scheme is focusing on first buyers buying new build properties only. Last year, there were something like 100,000 new homes built, which is the lowest figure since 1924 in peacetime. When we talked to the housing market-house builders-as part of the Plan for Growth, their concern at the moment was very much that there was a supply issue in the medium term, but in the short term there was a demand side issue. This is very much there to tackle that. Just to give a number of quotes since the budget-

Q347 Michael Fallon: No, hang on. What I asked you was whether you have measured the impact. Mr Ramsden says this will encourage transactions. We know the last Government made a mess of all this. You are saying the 10,000 first buyers scheme will encourage more transactions generally. Have you measured that? Is there a forecast of that?

Peter Schofield: This is potentially going to unlock a significant growth on the existing number of new build houses that are there. If we assumed that without this, we have another 100,000 new build homes in the current year, this is a 10% uplift on that. The Chief Executive of Barratt Developments said, "The Chancellor’s initiative to help first home buyers get onto the property ladder is exactly the tonic the housing market needed".

Q348 Michael Fallon: Yes. I was just asking you whether you had measured the tonic. That was all. If you have not, fine. If we then look at the planning changes in paragraph 182, Mr Schofield, you have done an estimate of the changes in 183-the MOD change in the sustainable; the planning default change-but there is no estimate for 182, is there? Page 29.

Peter Schofield: This is in the red book.

Michael Fallon: The Budget, page 29.

Peter Schofield: Yes, and it is developed further in the green book, in the Plan for Growth. What we did as part of the Plan for Growth on planning reform was to try to shift the balance in favour of development, and this is something that will take time to feed through, because fundamentally, the decisions we are talking about here are decisions that are taken by local planning authorities. We think that this presumption, which was underpinned by a written ministerial statement on the day of the Budget by the Secretary of State, will itself make a difference. It is going to be followed up by a new national planning policy framework that will be set out in the summer and hopefully come into force later in the year. These are steps that will change the balance, but I think it is quite difficult to forecast the precise impact of those, because this is about detailed decisions at a local level.

Q349 Michael Fallon: So you have not done any estimate of what the impact of these measures will be in three or four years’ time, for example, when all this stuff works through the planning system?

Dave Ramsden: There is a lot of international evidence that suggests that the UK planning system, and the barriers it provides to expansion, for example, is leading to lower productivity in UK retailing. It is one of the key obstacles to housing supply. We obtained the report that was done for CLG by Michael Ball of Reading University, which talked about development control costing the economy £3 billion per year, so there is quite a good evidence base here. This is all at the micro level. The OECD, for example, in their recent report on the UK, flagged up planning as one of the big areas that we should tackle. It is a very longstanding area. This is, we think, the most comprehensive approach to it so far, with the presumption to sustainable development and turning things around absolutely at the heart of this. We think there is real potential here upside on the OBR’s growth estimates over a period of time, and this is not going to be quick, to free up planning.

Q350 Michael Fallon: What puzzles me slightly is why you are able to estimate the impact of paragraph 183 as 20,000 new homes by 2014/15, but not apply a similar estimate to all the measure in paragraph 182. Does that sentence cover both?

Peter Schofield: 183 is specifically around the opportunities for the Ministry of Defence, and when we are talking about publicly-owned land, where we are the landowner and we are able to take forward development, it is much easier to predict.

Q351 Michael Fallon: What other measures are you taking to stimulate mortgage-lending by the banks, given that the FSA seems to be working in the opposite direction and stopping anybody lending to home buyers.

Peter Schofield: I think there is a whole series of different approaches. The FSA are doing some work on this, as you say, but some of it will lead through, we think, into additional lending.

Q352 Michael Fallon: But there isn’t a housing lending target within Merlin, is there?

Peter Schofield: No, there is not. Merlin is focusing on business lending.

Q353 Michael Fallon: So what are you doing to encourage the banks to lend to people who want to buy homes?

Dave Ramsden: The main thing we are doing is making the contribution that we can in the Treasury to advise the Government on what is needed to ensure a stable macroeconomy. We think that is the best context to an environment that gives people confidence to seek to borrow money; it helps banks to improve their balance sheets over time so that they are in a position to be able to balance the need to build up their balance sheets and their capital with the requirements of the economy and the requirements for new lending, both to businesses and to households.

Q354 Michael Fallon: Are you not concerned in the Treasury that the FSA is actually working against this, given that it is mortgage-reviewing and making lending conditions tighter?

Dave Ramsden: We know that the FSA is very conscious of the trade-off that has to be struck here. There is a balance to be struck here.

Q355 Chair: Frankly, that does not sound like much of an answer, really. You are just saying, "Well, we are relying on macrostability" to deal with what appear to be regulatory interventions in the market that are going to curtail lending, pushing in the opposite direction to one of the key policy measures in this field in the Budget.

Dave Ramsden: I am surprised that you do not think macrostability is at the heart of the whole of the Budget.

Chair: I did not say that at all. I said that you are relying exclusively on it.

Dave Ramsden: I did not say we were relying exclusively on it. I said that macrostability provides the framing context to everything else. If you did not have macrostability, you could really do what you liked on regulation, but it is quite likely that it would be counterproductive. I think macrostability provides the necessary condition, if you like, and then there is a balance to be struck on regulation to ensure that on the one hand, you make sure that the financial sector, after the crisis it has been through, is safer and less risky, and on the other hand, you can support the increase in households in the UK and the demand of those households for new property.

Q356 Chair: Are you engaged with the FSA in discussing the effects of these regulations?

Dave Ramsden: The Treasury is very engaged with the FSA, yes.

Q357 Andrea Leadsom: Just to pursue that a little bit further, does the amount of bank lending remain a key policy priority for the Treasury? Are you monitoring it? Are there further measures in place? Are there ongoing conversations with the banks?

Dave Ramsden: Absolutely, yes. Project Merlin was a big activity for the Treasury, and it is very much not a one-off. It was an attempt to take stock of what had happened before as to the effectiveness of previous efforts at this. It was reframed to take account of that with new lending commitments and new lending metrics. The part I was particularly involved in-and this was a cross-Treasury effort-was just liaising with the Bank of England and agreeing that they would publish some of the new metrics on their website to enable public scrutiny of the progress against the targets and also to help us in a policy sense, as we go through this year, to track what is actually happening.

Q358 Andrea Leadsom: The target for lending is a single number; it is not categorised. Do you think Project Merlin, per se, is going to deliver enough lending through the pipeline to SMEs to facilitate the private sector recovery that we are looking for?

Dave Ramsden: As I think you are implying, it does distinguish on the SME side, so it does have a global number and then a number for SMEs. I do not have-

Peter Schofield: It is a 15% increase. It is going to take it from £66 billion to £76 billion from last year to this year, so it is significant.

Q359 Andrea Leadsom: But it is a gross lending number, isn’t it? What was the thinking behind a gross lending number? In my constituency, I have a breakfast club for businesses, and the big issue for many businesses is that they are being offered a rollover of six months or eight months with a 2% up front arrangement fee, so the fact that the money is available is one thing, but whether they want to afford it and deal with the terms is another thing. You only have a gross lending number there. Is that loans made available or is it loans taken up? I believe it is the former, so if a facility is made available and the company decides, for whatever reason, it is not an attractive solution, that is then a plus to the banks and it is clearly a negative to the SMEs. To what extent are you able to press further? I am sorry I am jumping all over the place, but I would appreciate your answer. Why is it a gross lending figure and not a net lending figure?

Peter Schofield: We saw, particularly over the recent period, that the difficulty with a net lending figure is that you cannot address-and banks, to a large extent, cannot control-where corporates are paying back debt. Particularly during the period we have been through, it may make a lot of sense for businesses to repay their debt. That is not something that is in the control of the banks if businesses do that. The reason for focusing on a gross target is that you precisely capture the funds that are available to businesses to lend, and you focus on the thing that is more directly in the control of the banks.

Q360 Andrea Leadsom: Can I just come back at you again there? Again, though my own constituency experience, I have had a number of businesses saying to me that they have had their lines pulled by banks for reasons of not meeting loan-to-value ratios which, under normal circumstances, would be perfectly fine if you were a property company and there was a bit of a blip in the property market, but the banks have been using that as an opportunity to call back loans. Therefore, only focusing on a gross number does not take account of those instances where a bank might well decide to pull something in. There have been accusations, as you would expect, from businesses of the banks destroying a perfectly viable business for that reason, and having only a gross lending figure does not address that, does it?

Peter Schofield: We chose a gross figure because we thought it was the best measure to identify the thing that came under the control of the banks. I entirely appreciate the points you make. We do an awful lot of business engagement ourselves within the Treasury: talking to businesses and finding out what is going on on the ground. My perception is that over the last twelve months, the instances of people who say their access to finance is a constraint to growth has very much reduced. It is other sorts of barriers and other sorts of things that we cover in the Plan for Growth that are constraining business growth. I appreciate that you always do get those instances. It is hard to see why it is in the commercial interests of the banks to pull down a perfectly viable business, but this is something we keep a close eye on in a variety of different ways. One of the ways is by regular contact with the business community in a number of ways.

Q361 Andrea Leadsom: Is there a lack of competition among the SME lenders? Is that something you monitor? Do you feel that there is some sort of-dare I say-cartel going on among SME lenders?

Peter Schofield: This is something that the Independent Commission on Banking is looking at, and we are waiting to see what their recommendations are.

Dave Ramsden: They may be in niche areas, but there are examples of new entrants. I think Handels Bank has come into the market in certain parts of the UK and is building up relationships at a local level and is lending on the back of that. Back to my point about the broad context, when you look at the numbers out this morning for the whole-economy full national accounts for Q4 and therefore the first look at 2010, those show that for the whole corporate sector-and I recognise that there are different issues for small businesses-their financial position has significantly improved since the crisis. They have a lot of money where there is the potential for them to invest, which will encourage and be a driver of growth. I think the whole Budget strategy is about providing the stability and the confidence for those businesses to invest, because the large majority-as I think you have talked about previously at this Committee-of business investment comes from larger businesses, so it is, "How do we give those large businesses the confidence?" It is a combination of the macrostability that I have touched on and then the more detailed micro measures, including Project Merlin. They complement each other to create that environment. If you look at the growth of business investment in the year to Q4 in the latest estimates, it is up 12% on a year earlier. Given how much it fell in the crisis, there is still a long way for it to go and there is a lot of upside potential for further business investment.

Q362 Andrea Leadsom: But do you recognise that it is extraordinarily to get start-up financing for a new business? Secondly, do you also recognise that if you are an existing business and you want to shop around, it is almost impossible to switch banks unless the sun is shining and you really do not need the money?

Peter Schofield: I agree with what you say about start-up finance. That’s why we have a package of measures set out in the plan for growth, designed to do that, designed to help particularly at the start-up side and particularly to incentivise entrepreneurs and business angel investments. I do appreciate that. One other point in terms of additional sources of finance that might be worth mentioning to the Committee, sort of slightly further up the scale, sort of mid-cap area, there is a question whether businesses have access to the capital markets or whether they’re entirely reliant on banks. I’m pleased there have been a number of new entrants coming into this market. M&G have set up a fund, but one of the points that we make in the plan for growth is that we continue to monitor that, because that, if you compare the UK mid-cap with the US equivalent size mid-caps, many of them have access to the capital markets as an alternative to bank lending, which I think is a positive area.

Q363 Andrea Leadsom: So will UKFI be looking at taking the taxpayers’ shareholdings in some of the major UK banks and restructuring them into new specialist lending banks and selling them to the high street names, perhaps, to create new competition, new access to finance to businesses, or is that not in scope?

Peter Schofield: No, I mean UKFI have a very clear mandate, which is to be the arm’s-length owner of the Government’s shares in the nationalised banks. Remember, their room for manoeuvre is constrained by the fact that these are listed companies with other investors.

Andrea Leadsom: If you’re the majority shareholder, you can do anything. You own them, so you can do anything. So if we wanted to do that, we could do that.

Peter Schofield: Well, I would question whether that is, indeed, the case.

Q364 Mr Mudie: The OBR want you to provide them with specific workforce plans so that they can forecast employment numbers in the public sector. When will you be able to give them these?

Peter Schofield: This is, sorry, the OBR have asked for.

Mr Mudie: Yes, a bottom-up approach to forecasting public sector employment, so they want specific workforce plans. I mean, yes, and they tell us they have raised it with you, and the answer I seem to think: you were going to get around to it when you felt you could do it. We were just wondering as a Committee when you would get around to it and when you thought you could do it.

Peter Schofield: Well, the way I would answer that question is just to sort of focus on the way in which we manage the workforce across the public sector. Apart from the Spending Review, we require departments to make administrative savings of at least 33%, which they did, or they have set out plans that imply that, but precisely how they do that, well, these are decisions that are taken by different managers at different levels across the whole public sector. So I don’t think we are in a position to provide the Committee with any sort of detailed workforce plans or numbers area by area across the whole public sector.

Q365 Mr Mudie: In the cuts, or in public expenditure terms, what is the percentage of public expenditure, the public expenditure that we are talking about, is wages, salaries, numbers? Well, I know numbers, salaries. How important a part is it?

Peter Schofield: It is an incredibly important part. I mean, you’re absolutely right; so many public services-

Q366 Mr Mudie: Do you know which percentage of the budget? I used to know when I ran Leeds a percentage of the budget. I even knew the numbers. I even knew the numbers by department. I knew them monthly. I analysed them. I checked them. I followed them. This was under Mrs Thatcher and it was important to do it, because she wanted cuts, or she limited budgets. What is the percentage, first of all? Do you know the percentage of the public expenditure that is devoted to labour?

Peter Schofield: We can certainly provide the Committee with the proportion of public spending that is accounted for by labour, labour force costs. But I suppose I was just answering your question, which I thought was about whether we in the Treasury have detailed workforce plans bottom-up in terms of service by service, area by area, of what that means for public sector employment.

Q367 Mr Mudie: Well, when you agreed with Departments the public expenditure totals for the next five years in the spending review, was it just because it suggests this top-down approach that it was, "We just want this amount of money from you; how you do it is your business"? It did not get down to the level of deciding how many people would leave. No, it was just simply, "agree this 25% cut and get on with it".

Peter Schofield: That is a characterisation that I would not necessarily accept. I think what I am saying is, when we made those plans, it was done on the basis of detailed discussion between the Treasury and the relevant Government Department about what the indications would be.

Mr Mudie: Yes, I accept that.

Peter Schofield: But for each Department, they then have to go away and sort of take their-

Mr Mudie: No, but if I were a minister and you said to me, "We have the target for your Department; it is 25%" and I said, "I’ll meet it", was that enough? You did not say, "Well, give me your plans so that I can be assured you are going to meet it". And the point I’m making: if labour is a very serious proportion of the expenditure, I would expect you to say and back it up with figures.

Dave Ramsden: Can I give an example for the Treasury-

Mr Mudie: Yes, go on then.

Dave Ramsden: -where we went through exactly that process? For the Treasury’s own, the Treasury as a Department-I know it is not very big in these terms, but the Treasury’s budget is driven almost entirely by its workforce. When we were told how much we were going to have to find as part of the spending review settlement, the Treasury management did a lot of work on whether that was achievable and how we would go about doing that.

Q368 Mr Mudie: David, the point I am making: take it away from the Treasury and an important part of this discussion is that we have a guarantee that front-line forces will be left alone; that is a very political issue, whether it is dropping down to policemen, nurses, teachers. Now, in the education Department, they agreed a budget with you. A very serious part, even more serious in general in education, must be staff. How many staff did they offer you and how many staff did you accept? Did they say, "This is going to be 5,000, 10,000 and there is the figures in terms of their salary", or did they say, "Give us the figure you want overall and we will meet it" and, therefore, you and nobody in the centre knew of how they would reach that figure?

Peter Schofield: Well, I thought-

Mr Mudie: No, David was answering the question, because he chipped in and saved you.

Dave Ramsden: My example was just meant to illustrate that Department-

Q369 Mr Mudie: I know your example, but Treasury, bloody hell, you could do that on a Monday morning. We are talking about education, the education authorities, colleges. We are talking about a lot of staff, major staff now, but it is a major budget, and so if you agreed 25% was on, I just want some assurance: that you knew what they were saying in terms of offering you savings; were they deliverable and were they deliverable on the public terms of not affecting front-line services? Now, what assurances can you give me? How many people are going to lose their jobs in education over the next five years, a yearly figure? Can you assist?

Peter Schofield: The Department for Education, as part of their spending review proposals, set out what they thought they needed in order to achieve certain outcomes. There will be a huge amount of analysis that sits behind that, but remember that colleges, schools, they have local autonomy about how they use their money, so I think it is very difficult for us to-

Q370 Mr Mudie: No, no, no, look, if you are the Treasury and you are trying to save brass, it is fine for the Departments to say, "We will meet them and here are some figures", but that is an important point. The Office of Budget Responsibility say you do not have these figures or, if you have them, you are not giving them to them. Now, do you have the figures? That is the point. You are saying to me, "Well, they gave us figures". Do you have these figures, these labour figures? You should have them, because you should have them, and you should have them on a five-year programme. You should have them on a yearly programme, and the minute the year starts, you should be tracking the Departments to make sure that it is going well. Now, are you telling me that you do not do that, and you do not have the machinery to do that?

Peter Schofield: No, we are certainly tracking outcomes. We are certainly trying to make sure of the money that is invested.

Q371 Mr Mudie: Yes, in a money term, you may be tracking outcomes, but are you tracking workforces?

Peter Schofield: I imagine we can track workforces in terms of the data about what is happening, but if the question is, "Do we and the Treasury know exactly how many people are going to be employed by the local primary school down the road that my son goes to?" for example, no, we do not and I think that would be entirely wrong for us to be in that position.

Q372 Mr Mudie: No, and I accept that. Well, let us just clear this policy point. The OBR told us-and we have it verbatim, so I am mishearing them-that they had asked you and expected sometime in the future, so it would improve the way they are doing it now, which is just forecasting in terms of money, but not heads. That is important for the rebalancing the economy: public sector jobs going out and being available for the private sector. Now, they say they have asked you and they say they have said vaguely you will get around to it in the future and you will tell them. Now, have you any intention of actually doing this bottom-up approach, because the OBR think you are and I, certainly, as a Member of this Committee, think you should be? Are you?

Dave Ramsden: The point is, up until now, we have been reliant on the OBR using the same or a similar methodology to that which the Treasury used to use.

Mr Mudie: They have been dependent on you, because that is the only thing you have.

Dave Ramsden: What happened was we used to run these models for the previous Government. We handed them over to the OBR. They have developed them themselves, as they set out.

Q373 Mr Mudie: As the Chairman would say, David, that is not an answer to the question. Are you going to do it? When are you going to move to bottom-up specific workforce plans?

Dave Ramsden: The position is, as set out very clearly and very transparently by the OBR in box 3.6 of their document about the current methodology, how they have refined it for this forecast, and what I am saying is that, over time, as you have said, at some point in the future-

Q374 Mr Mudie: Well, what?

Dave Ramsden: Well, as more and more of these plans become available, it will be possible to build them up to see what they imply.

Q375 Mr Mudie: No, that is the answer you gave the OBR and that is not acceptable. This is public money. The Government has put forward plans and you have been central to it. I am asking, "How detailed are these plans?" and you say, "Substantial part, seriously substantial part is labour". So I say, "Okay, so you have workforce plans or you are working on them" and you say to the OBR, "Yes, we are. We cannot tell me when we will do it" and you have just told me the same thing. Are you going to do it?

Dave Ramsden: We have to-

Mr Mudie: Yes or no?

Dave Ramsden: We have to look at the viability of bringing all-

Mr Mudie: So you have not decided to do it yet.

Dave Ramsden: No, of bringing all that information together. I can tell you today what the plan is for the Treasury, where, as you say, it is very easy to do.

Mr Mudie: I get the answer, David.

Q376 Mr Umunna: Can I ask how much you think the proposals in this plan for growth are going to boost the long-term growth rate of the UK economy?

Dave Ramsden: I think the plan for growth and many other policies that the Government has announced, the way to think of them is providing an upside risk to the growth forecast of the OBR. We discussed the specifics of the plan for growth with the OBR and discussed with them the analysis, some of which they summarised in their document as to what, for example, might be the impact of the planning reforms. Their judgment was to not take any account of the plan for growth in their estimate of potential growth. In doing that, they were following the convention that was followed by the previous Government in terms of analysis of policies.

Q377 Mr Umunna: So is the answer to my question yes or no?

Dave Ramsden: I think, as I have said, the best way to think of this is that the OBR, when they were set up, came up with a new estimate of trend growth for the UK that was lower than the previous Government’s estimate of 2.35 for the next few years, then falling after that for demographic reasons. They have, since then, chosen to not revise that estimate to reflect either new developments such as, for example, changes in migration data relative to their assumptions, or new policies such as the plan for growth. Since their job is to provide the fiscal forecasts for the Government, I think that is a reasonable place for them to be positioning themselves. If, for example-and this goes back to the example I was giving to the Chair earlier-they said, "Okay, let us assume that growth is going to be 0.5% higher over the forecast period", or that the level of growth at the end of the forecast period is going to be, say, 3% higher, which is an OECD estimate, when they have looked at similar types of policies. In a sense, that would immediately change the fiscal outlook, but it would not be based on any actual evidence of the impact of the policies.

Mr Umunna: So you have produced this 126-page green document and you cannot tell us whether it is going to boost the long-term trend growth rate.

Dave Ramsden: My assessment is that it provides an upside risk to the OBR’s current estimate. It also reinforces the rebalancing of the UK economy, which is critical to make the UK economy more resilient in the future.

Q378 Mr Umunna: Does it do anything to promote the ling-run productivity growth?

Dave Ramsden: Yes, I think it does, if you like in terms of you can look across planning; you can look across less regulation; you can look across lending; you can look across tax. You can say all these things-and this has been the business response-are potentially good. They are also potentially good in terms of encouraging the private sector to invest, which is critical to the rebalancing. In an analytical, arithmetic sense, the OBR have not factored anything in. So in a technical sense, they have not, but I think it provides in a technical sense upside risk to their forecast.

Mr Umunna: Let us look at a couple of those things.

Dave Ramsden: And I think it will improve.

Q379 Mr Umunna: Let us look at a couple of those things. You were talking with Andrea Leadsom earlier about Merlin and, on page 22 of the document, you make a great play that this agreement had been secured with the country’s biggest banks to increase lending. In the Chancellor’s statement that he gave to the House in relation to Project Merlin, he said that the lending targets and whether they would be met would be tied to the remuneration packages of the major banks’ CEOs. Do you remember that? You said that you have been particularly involved in this.

Peter Schofield: Yes.

Q380 Mr Umunna: Do you know from the banks what weight they give in the performance matrix that is used to determine remuneration, what weight they give to whether or not the bank in that remuneration year has met a lending target in Merlin?

Peter Schofield: I do not have the specific metrics, but I can assure the Committee that this is exactly the way the agreement has been put in place.

Q381 Mr Umunna: If you look in the small print of the agreement, the Chancellor gave the impression in his statement that CEO pay would be tied to whether or not the lending targets in Merlin were met. But when you actually go and look at the small print of Merlin, it simply says that, whether or not the lending target is met, is one of many factors that will be considered in the round in determining whether or not the CEO has met their performance targets. Can you explain the disparity? I am a former corporate employment lawyer. I used to draft a lot of these agreements and I know that, if you look at the small print of Merlin, actually, there could potentially not be much of a link at al between the CEO’s remuneration and whether or not the Merlin targets are met.

Peter Schofield: Well, I think, clearly, you do not have, I guess, the sort of detail about precisely how that will be taken into account, but I think the Chancellor’s statement is very clear, and that will be the way in which UKTI will monitor the activity of the remuneration committee.

Mr Umunna: It might be clear, but in some senses it could very well be wrong in suggesting there is a strong link between CEO pay and whether or not the Merlin target is met.

Peter Schofield: I think there will be a strong link.

Q382 Mr Umunna: But you do not know. Do you know? Do you know? In all of the CEOs who are covered by the Merlin agreement, do you know how those banks-? Do you know how the weight in each individual case that they are giving in the performance matrix as to whether or not the bank has met its lending target? You do not, do you?

Peter Schofield: I do not myself have that information, no.

Q383 Mr Umunna: Does the Treasury have that information?

Peter Schofield: I am sure the Treasury knows more about. We could provide more information.

Q384 Mr Umunna: Could you provide us with information telling us, in each case, with the major banks involved with Merlin, what weight they are giving in the performance matrix of the CEOs concerned to whether the Merlin lending targets are met?

Peter Schofield: I am sure we can provide that to you.

Q385 Mr Umunna: Thank you. Can I just also ask another question? If I refer you to page 53 of the plan for growth, where it talks about the repeal of the right to request flexible working under the section that talks about the various regulations that are going to be scrapped to help boost business and investment. It talks about the repeal to the right to request flexible working to parents of 17-year-olds, which was planned for April. It refers to that having an administrative burden on business costing £0.5 million. It references the impact assessment that the business Department produced on that particular measure in October last year. Can I ask you why, in this BIS-Treasury document, you refer to the administrative burden, but you do not actually tell the whole story? Why do you not, for example, mention the figures that are given in that impact assessment, which say the cost of extending the right to request flexible working to the parents of 17-year-olds costing business £2.27 million, but it also shows that there are savings to business of £2.4 million a year and, over 10 years, there is a £41.2 million saving to business? Why do you not mention those figures in the plan for growth?

Peter Schofield: Well, you have those figures available to you in the impact assessment.

Q386 Mr Umunna: But I am asking: why do you talk in relation to that measure, about the burden on business, without mentioning the savings on business, which according to your figures, Government figures, are greater than the costs? Why do you not mention that here?

Peter Schofield: Well, throughout this section of the document, we talk about the cost to business. I do not think what we say here is inconsistent with what we say elsewhere in the document.

Q387 Mr Umunna: It is not, but you are not telling the whole story, are you? You are putting it here as if it is going to help boost growth, but actually in the long term it is going to save more money for business than it will cost.

Peter Schofield: One of the points that came out very clearly in our work on the plan for growth is that this process of the right to request underpins the right to request time off to train, which is one of the other bullets here; this process creates a huge amount of bureaucracy and form filling, which particularly for smaller businesses is distracting.

Q388 Mr Umunna: But both of those things-and the same applies to the impact assessment on the right to request flexible working to go and train-both of your impact assessments factor-in all that form filling, or are we not to give any credence or pay any attention to impact assessments that the Government produces?

Peter Schofield: No, I agree. That is right, but when we then went through our process of talking to businesses as part of this study, we identified that, particularly for smaller businesses, where there is not a sort of professional separate HR function, many of these processes, the burden of those processes falls on the proprietor.

Q389 Mr Umunna: But did you not talk to them when you were doing your impact assessments?

Peter Schofield: All of these things were taken into account.

Q390 Mr Umunna: The thing that I do not understand is: you have two impact assessments here that are saying there is a positive benefit to business of having the right to request flexible working through higher productivity from your employees, reduced absenteeism and so on, and yet you are pushing forward with scrapping both of those things, when arguably they are actually helping business. Is the truth not, Mr Schofield, that the scrapping of both of those extensions of the right to request flexible working are really just gimmicks?

Peter Schofield: No, I disagree with that thinking.

Mr Umunna: That is based on your own impact assessments.

Peter Schofield: No, what we are looking at-and this is something where there will be a further consultation later on at the end of parliament-is whether we can introduce flexible working without the bureaucracy that goes with the whole sort of existing right to request process. What we are looking at doing is whether we can find other ways of achieving the same benefits. The same is true, if I might say, referring to the right to request time off to train. Clearly, workforce-based training is a good thing for the economy, but the processes around right to request are imposing a burden that the Government would like to try to strip away. So we are finding other ways of trying to promote workforce-based training, and you will see a lot of those measures elsewhere in the plan for growth, like apprenticeships, for example.

Q391 Mark Garnier: Sticking with the plan for growth, you identify a number of sectors, on which you want to encourage specific growth. This is page 8 and 9. What was the thinking behind choosing those sectors?

Peter Schofield: As part of the growth plan, what we did, we felt we wanted to get into the challenges for UK companies in two different ways. We wanted to do this looking at cross-economy issues, so you will see seven of the fifteen workstreams were around cross-economy issues, like planning regulation-we have already talked about those-access to finance and so on.

We also felt it would be really helpful if we could do a deep-dive in our business engagement by focusing on specific sectors. Now, we chose the eight sectors that you have here. In subsequent phases of the growth review, I am sure we will look at other sectors as well. Now, why did we choose these particular ones? Partly because of their scale. Professional business services is the largest sector in the UK. Retail comes, I think, second, and advanced manufacturing third. Partly because we thought they were sectors here where the UK had or could develop a comparative advantage, so for example life sciences, digital and creative industries. And partly, we focused on those growth sectors where we thought the UK, if we could unlock growth potential, they would have a particularly beneficial impact on employment, because they are non-traded sectors, so for example, construction and retail. It was a combination of those measures that led to us coming up with the eight that you see in the plan.

Q392 Mark Garnier: There is much made of trying to become international leaders in these particular sectors. Have you gone out and looked around the world to see where we can successfully compete, or are you to a certain extent just looking around and saying, "This is where other people are good at; we will do better at it"? What sort of motivation do you have?

Peter Schofield: I think it is a combination of the two, to be honest. You will see for advanced manufacturing, for example, some of the graphs and some of the analysis set out in the plan for growth compares the UK with Germany, as well as looking at the opportunities we have in the UK to leverage on some of the research and technical capability that sits inside the UK’s very high quality universities. The proposal around a technology and innovation centre for advanced manufacturing is borrowed from the Fraunhofer concept, which works very well in Germany, where they bring together in one place industry and academics, the supply chain as well as big manufacturers, to try to make sure that UK businesses maximise on the potential that comes out of high quality research.

Q393 Mark Garnier: Okay, to what extent are you also trying to rebalance the economy, because one of the big problems we have is that the UK economy is still largely dependent on the financial services sector? Obviously, you do not want to shrink the financial services sector, or I am hoping you do not want to shrink it, but are you making a conscious decision to actually boost, not only different sectors, but counter-cyclical sectors and try to rebalance the economy that way?

Dave Ramsden: I think the rebalancing part of the plan for growth has not come to the fore as much as the "will it add to growth?" part. Rebalancing is incredibly important at the macro-level as I was saying earlier. It is also important at the micro-level to make for a more resilient economy. One thing that has really struck me through the aftermath of the financial crisis is just how small, for example, as a share of GDP, UK manufacturing has become.

Q394 Mark Garnier: Do you know what that number is?

Dave Ramsden: It is about 11% now. For the previous Government’s estimate of an on-trend point in 2007, it was 2.5%, but that was down from 20% in 1997. Now, most economies that are developed have a manufacturing sector that is not growing as a share of GDP. In very few is the manufacturing sector shrinking or has shrunk as quickly as it has in the UK. That has meant that, for example, the UK has seen, I think, good export performance through last year, but actually when you look at the import performance, it was stronger than I, for example, was expecting. The net trade contribution to growth was very weak last year; indeed, weaker than one might have expected.

So it is not that we are saying we have a target for manufacturing as a share of GDP, for example, but we are very cognisant of the kinds of characteristics that the UK economy now has. What can we do to build on the remaining strength in advanced manufacturing, for example? Also we have to reflect, as Peter was saying, we have sectors like retail, which are less traded, where we think the UK retail sector-and there is good evidence of this-is held back, for example, by the planning regulations. So it is a bit of looking for where, for example, in advanced manufacturing, we can see potential growth markets, which for Germany for example, has really benefitted through the recovery phase. One of the reasons German growth has been so strong is its strength in investment goods, for example. The UK, we would like to see us able to exploit more of the markets such as the BRICs, China, Brazil, India, where as you know well we currently do less trade than we do for example with Ireland.

We are hoping to see those export patterns improve. That is why there is a real focus on the work of UKTI in the growth plan. It is really quite granular looking in terms of the policy, but also on some of the analysis, looking at where the UK has come from, and the potential for where it could go, to make for a more resilient rebalanced economy, so when other shocks come along, the UK does not take such a big hit as it took through the crisis after 2007.

Q395 Mark Garnier: You do talk about the growth. I will quote. "The growth will continue through the rest of this parliament to provide an ongoing focus on what Government can do to support growth." Are we going to expect in each subsequent budget to have more like this, more fiscally neutral budgets but with specific policies targeted on certain areas? Supplementary to that question, if you would like to take them both at one time, is: are you going to be focusing on these areas in order to try to take a look and see what has happened. For example, in the space industry, do you need to further reform the Outer Space Act, for example, or are you going to be looking at different parts of the economy and sort of say, "This has worked; now we need to concentrate on something else"?

Dave Ramsden: I will start, just because your question flags up a really important part of the growth review, and there is a box on page 6, which flags that there are four ambitions, if you like. Under those, there are those benchmarks that we want to set UK performance against. This is very much in an ongoing sense, so this is as much about an ongoing review of both how our interventions stack up against these ambitions and these benchmarks, and then as we see the UK economy develop, what that means for the individual sectors that Peter was talking about that we have already looked at, other sectors, but also: are we making progress, for example, on planning; are we making progress on-? The feedback from people like the CBI is that they want this to be ongoing. They do not want this to be a kind of event and then we kind of move on, but that we keep coming back to this. We view progress. There is some accountability.

Peter Schofield: Yes, Dave has basically said it all. What we have said in this document is that this is only just the start of an ongoing process, which will continue for the whole of the parliament. A key challenge for us going forward is implementation. There are a whole load of measures here. We need to make sure that what we say we are going to do we do. We also need to constantly measure ourselves against the 16 benchmarks that Dave was talking about and then, yes, we do want to look at other topics, maybe other sectors, maybe other cross-economy themes, so that in subsequent budgets we have more to say in terms of pushing forward the supply side agenda.

Q396 John Thurso: I want to ask about the supplementary oil and gas levy, but can I very quickly follow up on that last section, Mr Schofield? One of the sectors in the growth is tourism, which I know a little bit about. I am still President of the Tourism Society of the United Kingdom. There is a shed load of academic research, which says two things, if you want to get tourism going. One is simply spend a bit more money in marketing it and the other is cut VAT and make yourself competitive. The Treasury has always said "Absolutely no" to cutting VAT, but why do we not invest more money in Visit Britain, rather than cutting it by 30%, because there is a very direct parallel over two decades now of Governments cutting the grant and the numbers getting worse? I mean it is just blindingly obvious.

Peter Schofield: Well, Mr Thurso, I would respond to that by saying there are a number of things that Government can do and, indeed, the very, very final page of the growth document has 10 things that we say we are going to do. One of those is, I am pleased to say, co-funding with the private sector and marketing campaign aimed to attract visitors to the UK for the period following the Olympics. They are making the most of that, but I do not think that is the only thing that matters. Everything else on this page, I would say also matters.

Q397 John Thurso: I will believe it when I see it. Now, Dave, perhaps you can tell me who is best to answer the question. I want to ask about the process. It is a follow-up to the questions that I was asking the OBR in relation to the change to the supplementary oil and gas levy. You heard what I was asking as well.

Edward Troup: I heard you asking earlier.

Q398 John Thurso: When was the decision made to both cut fuel duty and to fund it by increasing the supplementary oil and gas levy?

Edward Troup: You have seen the OBR’s report, which made it clear that the decision on fuel duty arrived after 9 March and, obviously, by implication, the supplementary charge decision was made before 9 March.

Q399 John Thurso: What work did you do looking at the impact of that decision on investment in the North Sea?

Edward Troup: Obviously, the Treasury does a lot of work on all the tax levers on an ongoing basis. This was a tax lever, which was pulled in 2005, when the supplementary charge was last increased and we did a lot of work leading up to that increase and have done a lot of evaluation since then. It is something that has been kept continuously under review, because obviously the North Sea is both important fiscally and extremely important to the UK as a national resource.

In looking at any particular policy measure as it comes up to a budget decision, we ramp up the analysis accordingly, so quite a lot of work was done over the period of time leading up to the budget on the likely impact on production investment and all the other factors around this particular industry.

Q400 John Thurso: What conclusion did you come to with regard to production and investment?

Edward Troup: The two of course are different and I think it was Graham Parker saying earlier that there is a significant time lag from investment decisions through production. The work we have done suggests that there will be no material impact on investment, but I think we recognise that any change of this nature-and we do recognise that it was a budget change, which was announced on budget and for very good reasons was not discussed with the industry beforehand-the industry will take pause to think and reflect when something like this happens. So the fact that some businesses are looking at the timing of decisions and thinking about things in the light of budget is inevitable, but overall, our analysis showed that we did not think there would be a material impact on investment over the totality of the North Sea.

Q401 John Thurso: Are you, therefore, surprised by the headlines in the press and journal announcing the cancellation by Statoil of their project?

Edward Troup: I saw the article. I do not think that is quite what it said, actually. It said that they were going to make a decision and they postponed making a decision. Although I think we are actually meeting that particular company next week, or my colleagues are, I do not think it actually said that they were postponing the investment. They were postponing the decision. As I say, I can understand that. When there is a change that does have a significant fiscal impact-and we are raising £2 billion more from the industry-the businesses affected will want to stop and think, and make sure their numbers work. I did not hear the whole of the OBR discussion, but obviously the point about the oil price was well made and our own analysis shows that, over the next five years, we expect the post-tax return per barrel of oil to be greater than the post-tax return per barrel of oil or gas equivalent over the last five years. So although this is a change parameter into the investment decisions, we do not think it will make a material difference.

It is quite interesting. The analysis we did going back to 2005 and in the year before the change in 2005, there was £4.8 billion of investment in the North Sea. In the three years following, the level of investment was over £6 billion in each of those years, and that was, as most investment in this sector is, a reflection of the fact that the oil price is the key determinant to investment decisions. So in the last change, investment went up 20% plus and sustained, remained up for the next three years. We are not making any forecast, I do not think, unless the OBR are, of the level of investment increasing, but as I say, we do think there will be no material impact from this change.

Q402 John Thurso: I think one of my colleagues may want to challenge some of the numbers, but the core point I want to get to is the clear advice that you have given the Chancellor in this regard is that there should be no material impact on overall investment in the North Sea oil sector as a result of these changes. That is your clear advice.

Edward Troup: Over the forecasting, yes, yes, absolutely.

Q403 John Thurso: The second point is turning to gas. Now Centrica has announced that all our North Sea projects, including those given the go-ahead very recently, are being re-evaluated. Projects that are no longer viable will be cancelled. It goes on to make a number of other points in that. It makes the point that the price of gas is currently trading below $60 and it is typically between $50 and $60 a barrel. This is well below the $75 a barrel trigger proposed by the fair fuel stabiliser bit of the proposal that, if oil drops below $65, the tax will start to come off. They also point out the differential in that oil prices are one world price. It is pretty clear, whereas gas prices, there is a far greater differential. The broad thrust of what they are saying is this will feed through into both electricity generation and domestic gas prices and, therefore, inflation. As they move, as they say here, "Move investment from this country to other sources in other parts of the world". Now, do you recognise any of that? Is that something that takes you by surprise?

Edward Troup: There are quite a lot of points in there.

John Thurso: I know. I am short of time, so I am trying to get as many in as possible.

Edward Troup: If you look at the OBR forecast of determinants, they will remind you that the gas price has, itself, increased by around 50% over the last two years and they are forecasting continuing increases. So it is not as though, although gas has been decoupled from the oil price recently, they have not enjoyed a very significant increase in the price.

The point about the prices to consumers, about three-quarters of oil in this country, looking at last year’s figures, was imported and about half of gas was imported, so although we do have a lower dependency on imported gas than we do on oil, nevertheless, I think it is a very significant part of consumption in the UK. It is increasingly a global commodity. It is shipped around a lot more than it used to be and we obviously cannot say exactly what is going to happen in the market, but we certainly do not expect the sort of feed-through to prices in the direct way your question implied.

Q404 John Thurso: Again, just to get this straight, your very clear advice to the Chancellor is broadly that this is wrong. They would say that, wouldn’t they? Once they have had a chance to look at this, not much will change.

Edward Troup: Well, look, I cannot say that nothing will change-

John Thurso: Broadly, it will change.

Edward Troup: -but the facts are that 60% of gas production is alongside oil production. The cost per barrel of oil equivalent investment-and these are the industry’s own figures-is about $15 per barrel of oil equivalent. For across the whole of the North Sea, the cost of production, oil and gas together is about $30. This is a much cheaper commodity to get out of the ground. Of course, it is a different commodity, but the intricacies of trying to separate gas taxation from oil taxation, given that 60% of gas production is part of oil productions, it simply would not have been a feasible policy choice to do that, even if we felt that there was a significant adverse impact from failing to differentiate between the two.

Q405 John Thurso: The other thing the OBR said, which I quoted to them, was the impact on the economy. This is regarding medium term oil price. The impact on the economy is highly uncertain, as are the projections of future North Sea oil production. I asked them, as I think you heard, whether they would be doing some work on this. Given that the Chancellor has clearly acted on the basis of the advice he has had, which is it might be a blip but it will work out, if that proves to be wrong and the uncertainty that the OBR are drawing our attention to proves to deliver a different conclusion, what is it open to the Chancellor then to do? What advice would you give him in that circumstance?

Edward Troup: Well, I am not going to speculate about what advice I would give to the Chancellor in hypothetical circumstances.

John Thurso: All right, I thought I would give it a try.

Edward Troup: It was a good try. What the Budget made clear, what the Chancellor did say, is we are interested in hearing from production companies about scope for extending the field allowance. The field allowance effectively allows you, for a designated type of field, to pay no supplementary charge at all on the first X barrels of units of production. That was introduced in 2009. It has already been taken up quite significantly. It is already bringing marginal fields into production and we are interested in talking to the production companies to see whether there is scope for extending that further, to help bring more marginal fields into production.

Q406 John Thurso: One of the critical areas, say, west of Shetland, where there are some very severe technological challenges, but it is nonetheless a very important reserve, what you are saying is that that allowance would enable that to be properly exploited and that it is that allowance that will enable that to happen.

Edward Troup: I am not sure whether west of Shetland is benefitting from any of the existing field allowance definitions. I know it has been a marginal field. I know there have been a number of issues. It is rather closer to home for you than it is for me, so you probably know it better than I do, but it is certainly something where, if there are marginal fields not currently benefitting from the field allowance, where it is possible to find a definition, which does not just give everybody a tax break, we will want to talk about it.

Q407 John Thurso: At the moment, there is no exploitation west of Shetland. We know it is there. They are testing. There is no production, sorry. There is exploitation. There are discoveries, but no actual production because of the difficulties. You would be open to advising the Chancellor in that circumstance that we should look at this as a continuation of the policy of enabling that to go ahead.

Edward Troup: Yes.

Q408 Stewart Hosie: You said oil price was a key determinant in whether exploration and then development goes ahead. It is a combination of the oil price and the tax regime, because the people, capital and kit are highly mobile. I am sure you would recognise that and I am sure you will also be aware of the work done some time ago by Professor Alex Kemp that showed the sensitivity in terms of the well seated tax changes.

You also gave an average production cost, but as John Thurso said, when you are dealing with the setting up for the first time in the very deep water west of Shetland, those production costs are significantly higher. Again, I am sure the Treasury would recognise that the average does not apply across the board. However, what you have done with the 60% hike in supplementary charge is create a 62% tax rate, and with the restriction on decommissioning reliefs, an 81% marginal rate for some of the more mature fields. Do you not think an 81% marginal rate is extraordinarily high?

Edward Troup: The 81% rate applies only to those mature fields where there is no further exploitation taking place that pay petroleum revenue tax. It is quite a high rate but, equally, there is not an issue with further investment needed there, and the oil is coming out of the ground. This is a pure profits tax, which effectively collects a share for the national Exchequer on that oil. The 62% rate, obviously, is higher than the 50% that is being paid until 24 March, but Norway, which obviously is quite a close competitor, charges 78%; and Denmark, 64%. While it is higher, it is not pricing us out of the game in terms of tax rates compared to some near neighbours.

Q409 Stewart Hosie: That is interesting, because that is really the key point about all of this, is it not? We are supposed to have an agenda for growth just now, but Statoil has halted this £3 billion development. That is a heavy-crude development in the Mariner field. It is putting a question mark over its sister field, which is the Bressay field. That might make it more difficult to get to and extract the 3.2 billion barrels south-east of Shetland. The industry is telling us that it is putting 40,000 current and future jobs at risk and Valiant has said the decision wiped 30 million off the stock price. I am struggling to see how we can have an agenda for growth with a 60% tax increase that halts investment decisions, threatens jobs, and weakens stock values. Why did nobody speak to the industry about this in advance?

Edward Troup: There are a number of points on that. First of all about the field allowance: that we do want to talk to those businesses for whom marginal investment is an issue and who feel that they are affected by this. We want to see whether there is scope for pushing field allowance out further to increase the return and promote investment. Secondly, on the point of talking to the industry in advance: with my comments earlier, I made the point that, with a tax change like this, it is very difficult to engage. I completely recognise that we are going and achieving a greater degree of stability and certainty across the tax system as a whole, with the way tax policy is made, but this is a change that has been a surprise to the industry. I am afraid that is part of the nature of decision-making in these circumstances, but we are now talking to the industry quite intensively. The other point I would make, which is the growth point, which is really the point Dave has made: what is important for growth more than anything else is the macroeconomic stability, which is about stability of the public finances. It is about all the factors that are covered in the plan for growth. Overall, if you look at the budget here, if you look at actually what fuel duty does to businesses, as you know as a business input, the high price of fuel to all those other businesses has been a significant dampener on them. This is, overall, a good budget for growth, but within that we recognise the issues to the North Sea, and do want to talk, as I have said, to those businesses.

Q410 Stewart Hosie: I am glad you recognise them, because it falls back to what the Chancellor said previously that he wanted stability and fairness for the UK oil tax regime, but this of course has not delivered that. It has delivered volatility when none was necessary. Now, I welcome the work on field allowance. That is good. I welcomed that at the time it was introduced, but it strikes me as extraordinary, quite extraordinary, and almost unique that such a major change was introduced without discussions first of all with the industry. I cannot remember the last time a significant change like this to North Sea oil was introduced without discussions with the sector.

Edward Troup: I am afraid there were no discussions in 2005, when we doubled the rate from 10% to 20%. I was not sitting here, but I was sitting in the Treasury. That was as much of a surprise to the industry as this was. As I have said before, as circumstances turned out, investment in the following year went from £4.8 to £6.4 billion. While, as I have said, I am not forecasting that, these things can happen and investment can continue and can continue strongly.

Q411 Stewart Hosie: One final question associated to this: obviously, there was a windfall for the North Sea last year because of the high price of a barrel. There is a forecast £3.5 billion windfall next year over last year’s forecast and there is a £2 billion or so in terms of the increased supplementary charge. Without that North Sea income, the Chancellor’s deficit would not have gone from £160 to £122 billion, but would be heading north to £130 billion. If the oil price collapses, what on earth happens to the Chancellor’s deficit forecasts?

Edward Troup: There are two things there. First of all-and I am trying to find the box in the OBR’s document-there is an analysis of the longer term impact of oil prices on revenues. AS you have probably seen from that, there is not forecast to be a significant net gain or net loss to the Exchequer from the oil price because of the offsetting effects within the economy. So were the oil price to fall back, while it would have a significant impact on North Sea revenues, and even more so for the fair fuel stabiliser, for it then to come into effect and reduce the supplementary charge, there would be offsetting benefits in terms of the impact on the economy, profits for companies, corporation tax, activity more widely.

I certainly do not have the sensitivity analysis here, but if the OBR have this right and it is agreed very much with the analysis we have done about oil price and the changes in the past, I would not expect in the longer term there to be that impact on the deficit reduction that you implied, even though there may be some short-term fluctuations. The fair fuel stabiliser itself would say, in the light of this, we need to adjust the tax burden between the different sectors as we have just done without actually having an overall impact on deficit reduction.

Q412 Mr Love: Can I turn to the Government’s flagship policy for increasing growth in the private sector, and that is the National Insurance contribution holiday for small companies outside London and the south-east. Can you give us any figures on the number of jobs that have been created so far and what your projections are for the future?

Edward Troup: I think this is something where we have to admit to being overoptimistic in the forecasts. We forecast 400,000 take-up in the period and we have had really quite a small fraction of that so far. We are some research at the moment, the results of which will be published shortly to set out what we do think it going to happen and, at some point, I am not quite sure when, we will reforecast the estimate, the take-up.

What has come out of that research is that, first of all, there are a number of factors where things have turned out slightly differently than we expected. First of all, a smaller proportion of new businesses employ people in the first year than we had estimated. Secondly, the awareness of small businesses of this relief, which is about one third, 35% or something, is slightly lower than we would have liked. There is a response to that in terms of putting more into promotion of this campaign. Interestingly, among the tax agents, accountants and the other advisors to businesses, around 70% were aware of it. For the businesses who were aware, they are extremely positive about it. They think it is a very good thing. They do actually see it as real support. It is £5,000 per employee and those who have become aware of it have taken it up, so this is not an issue of this not being the right policy. It is something where businesses that have become aware of it have taken up enthusiastically.

So the focus of attention now is to do two things: one is to promote it to increase awareness directly; the other is by giving the tax agents the right to make the claims on behalf of businesses. So far, it has been the businesses themselves who have to make the claim. Actually, we think we can leverage out the greater awareness among tax agents and get them to promote take-up.

Q413 Mr Love: There was a report in the FT, which talked a lot about bureaucracy putting people off and I, therefore, assume that the tax agents are trying to shift the bureaucracy away from the small business. I would like you to comment on that. The FT also talked about 1,500 jobs so far. Is that the order? Without getting you to be very specific, is that the order of magnitude that we are talking about? What sort of orders of magnitude are we looking at in terms of job creation on to your projections over the next two years or so?

Edward Troup: It is in the low thousands, so yes I am afraid that is the order of magnitude, although it is more than that, I think, from the latest figures. I think the bureaucracy point is quite interesting, because actually HMRC has put a lot of work into making this unbureaucratic. I think the issue has been about awareness. Funnily enough, it may relate to something Peter Schofield was talking about earlier. One of the things we are finding out from business is not that they did not receive awareness of this by some sort of notification, but that they receive so much stuff that, in a sense, they just sort of put it on one side and either did not really read it or did not get around to doing it. It is not that, when they have actually decided to do it, it has become too bureaucratic. It is rather like the burdens of business having to do something on flexible working or anything else. Businesses have an awful lot of stuff to cope with and, by trying to minimise that and focus on things actually that genuinely and directly do help them, we can do something for local employment.

Q414 Mr Love: The original idea was to create something in the region of 400,000 jobs. From your earlier answer, I would assume that is now being reduced significantly. What sort of order of magnitude are we talking about?

Edward Troup: First of all, just to be clear, it was not that we were saying we would create 400,000 jobs. We were saying 400,000 employees, or rather their employers, would benefit from this. So I do not think we were claiming direct job creation from this. Some of those jobs might well have been new, but I do not think we said or even estimated exactly what proportion would be new jobs. We are going to come out with a further revised estimate when we absorb this research. I assume we will have to discuss it with the OBR, but we will probably do our own internal forecasts first and hopefully publish those.

Q415 Mr Love: Can you give us a regional breakdown?

Edward Troup: I cannot, I am afraid.

Mr Love: Perhaps that is something-

Edward Troup: We will be able to do so.

Q416 Mr Love: I might as well ask all of these things. If you can give the Committee some idea of the number of jobs you expect-I take the point you make about the definition of jobs-to be created over the period of the policy, some form of regional breakdown, and some idea of the dead weight cost of the policy. Would that be possible?

Edward Troup: I do not know whether I can promise it as a note to the Committee immediately, but we will be putting all of that out at some point.

Mr Love: Okay, thanks very much.

Chair: Thank you very much for coming to see us today. I am sorry it has been a bit delayed, that we both started late and finished rather late, but it has been very informative and we are very grateful.