Budget 2012 - Treasury Contents

2  Macroeconomy

GDP growth forecast

9. Following the substantial revisions to the OBR's GDP growth forecasts in November 2011, there were only relatively small changes in the OBR's March 2012 forecast for GDP growth. As Table 1 shows, the OBR has revised its forecast for GDP growth to be 0.1 percentage points higher in 2012, and 0.1 percentage points lower in 2013. This leaves the shape of the forecast for GDP much the same as it was in November 2011, with GDP growth forecast to rise sharply from 2013 onwards. Table 1: GDP growth forecasts
Percentage change on previous year
March 2011
November 2011
March 2012

Source: OBR, Economic and fiscal outlook, March 2011, p 8, Table 1.1; OBR, Economic and fiscal outlook, November 2011, p 11, Table 1.1; OBR, Economic and fiscal outlook, March 2012, p 11, Table 1.1;

Figures in bold are outturns. All other figures are forecasts.


10. Two major risks to the UK economy were identified by the OBR and the Chancellor: continuing uncertainty around the state and impact of the eurozone crisis and the rise in oil prices. Despite the OBR's central forecast, which assumes the euro area finds a way through its current problems, the OBR stated that "the situation in the euro area remains a major risk to our forecast."[14] Although the OBR expects inflation to continue to fall, it has recognised that higher or lower externally-generated inflation remains a risk to its central forecast. For example, a shock to oil prices would generate higher inflation than within its current forecast.[15]

11. For the first time the OBR has conducted scenario analyses of these two major risks:

  • a eurozone event's effect on the UK based on an OECD stylised downside scenario in which a disorderly sovereign debt restructuring leads to a tightening of credit conditions and significantly lower growth, and
  • a temporary oil price spike in which a temporary shock raises oil prices significantly in the short term.

12. The Chancellor told us that:

    I do not think the euro crisis has disappeared. I think the action from the European Central Bank is extremely welcome, but that is not a long-term solution to the problem. I think that high oil prices are a cause of concern for every western Government at the moment, and indeed other Governments. I think there is also the challenge that the OBR always puts to us, which is whether we have properly assessed—it includes itself in this—the depth of the effects of the financial crisis.[16]

13. When considering the risk to the UK emanating from the eurozone, two particular transmission mechanisms were discussed: the trade route and the banking sector. We asked witnesses to consider which transmission mechanism was of most concern. Banking sector risks were perceived to be greater than through the trade route. As Dr Hilliard of Société Générale told us:

    I think that the banking sector is the greater risk. What I would also add though is that I think that the risks are diminishing. I am not saying that in any way we are out of the crisis, but the stabilisation measures taken by the ECB in particular are going a long way to reassure people.[17]


    I have to say that one of the hopes rather than forecasts in a lot of these OBR forecasts and others, is the increasing contribution of net exports over the medium term.[18]

The Chancellor's view was that:

    I think the financial crisis [...] has potentially the most catastrophic effects. [...] I think the fear last autumn [...] was that there was going to be some catastrophic event—either a collapse of a eurozone bank or a failed sovereign debt auction for one of the peripheral countries. In November or December, that was a very acute fear. You can see that the impact on business investment in this country, let alone in eurozone countries, was pretty acute.[19]

14. As noted by the OBR and others there is a definite risk of an oil price spike resulting from increased political tensions in the Gulf region, from a drop in supply, or by a "fear premium" in the markets pushing up prices.[20] When asked about the impact of an oil price spike Mr. Chote responded that:

    People are a bit more concerned about the possible implications of higher oil prices than they were before, but that has been a change over a couple of months, and doubtless the balance of things to be worried about will change in the coming months.[21]

    The oil price story is part of a broader one which relates to the last question of how quickly inflation will inflation fall. Will there be other factors—food prices, for example—that might mean that the fall in inflation is not quite as quick as the central forecast suggests, and therefore how soon will it be and with what strength will it be that earnings growth outpaces price growth? That remains an uncertainty, and it is not just down to oil.[22]

This view about the potential impact of an oil price rise on inflation was echoed by Dr Larsen of RBC Capital Markets:

    I don't think from the demand side that the UK economy is directly that vulnerable to an oil price increase. However, it could obviously be very important for the global economic outlook, therefore eventually for our export markets, and certainly for market sentiment. In that sense, it is a very important issue in terms of the global outlook. The direct issue for the UK might well be pressure on inflation; that we end up with higher inflation and further erosion of real income and a further difficulty for the Bank of England—for the Monetary Policy Committee—in supporting the view that inflation is going to come down quickly. I have certainly shifted up my inflation forecast significantly on the back of the news we have seen about oil prices and commodity prices more generally. That would be a worry for monetary credibility, but it would also be a worry for the outlook for the consumer.[23]

15. We asked our witnesses to consider the balance of these two major risks: the eurozone and a spike in oil prices. In response to our question as to which risk was worse and whether the OBR had considered other scenarios, Professor Nickell stated that:

    Specifying the kind of disaster and ranking them in terms of probability, is not something we have devoted a great deal of time to.[24]

    The eurozone disaster has an especially severe impact on the banking system of the eurozone, whereas an oil price spike, which we have in another scenario, does not have such a detrimental impact on the banking system of the Eurozone. That is the key. A eurozone disaster has one of its main impacts on the UK because of its effect on the banking system so we get a repetition of what we had in 2008, but from another direction.[25]

Mr. Chote noted that:

    So much depends in all these systems, again, on the extent to which the impact of the crisis on the UK manifests itself in a further structural deterioration of the sort that we have seen over the course of the last crisis. That is why [...] one would be particularly worried about the sort of crisis that led to severe difficulties in terms of the credit crunch—which, at the moment, is the best explanation we have for why the path of potential GDP seems to have moved so much off the previous, pre-crisis path—versus other sorts of crises that show up as a temporary hit to demand, movements in exchange rates or a change in Government bond yields, for example.

16. We welcome the OBR's use of scenario analysis to further its understanding of the major risks to the UK economy. The Treasury Committee recommends that the OBR consider a wider range of risks and associated scenarios in subsequent forecasts. Such examination might include ranking the risks by both likelihood and significance to the UK economy. The examination should also include an explanation of the extent to which the fan charts provided by the OBR reflect this information.

Composition of GDP growthTable 2: Expenditure contributions to GDP growth
Percentage points, unless otherwise stated
GDP growth, per cent
2.1 (1.8)
0.8 (0.9)





Main contributions
Private consumption
0.8 (0.7)






Business investment2
-0.2 (0.1)






Dwellings investment3
0.4 (0.3)






0.5 (0.4)
-0.3 (0.3)





Change in inventories
1.3 (1.3)






Net trade








Source: OBR, Economic and fiscal outlook, March 2012, p 56, Table 3.4; OBR, Economic and fiscal outlook, November 2011, p 73, Table 3.4

1.  Figures in italics are from November 2011 forecast. Components may not sum to total due to rounding and statistical discrepancy.

2.  The sum of public corporations and private sector investment in new dwellings and improvements to dwellings

3.  The sum of government consumption and general government investment

17. While the OBR's overall GDP growth forecast has not changed significantly since November 2011, the forecast for the underlying expenditure components of GDP growth has changed. As Table 2 shows, the OBR now forecasts that GDP growth will be driven less by business investment, and more by consumption, with the expenditure contribution from government now forecast to be less of a drag on GDP growth going forward. However, business investment remains significant for the overall GDP growth forecast, as by 2016 business investment is forecast to make up 29 per cent of the positive contributions to GDP growth in that year.[26] The OBR, in its March 2012 Economic and fiscal outlook, noted that:

    Private consumption growth forecast implies that consumer spending will continue to fall as a share of GDP, before stabilising in later years. Business investment and net trade are expected to contribute a large proportion of forecast GDP growth. These trends are driven by the sustained depreciation of the real exchange rate and the ongoing fiscal consolidation, which releases resources for private sector investment.[27]

Business investment

18. The OBR has reduced its forecast for the growth of business investment. The OBR now forecasts that real business investment growth will be 0.7 per cent in 2012, a reduction of 6.9 percentage points since the November forecast. While business investment is then expected to grow strongly from 2013 to the end of the forecast horizon in 2016, the forecast for each year's growth in business investment has been reduced since the November 2011 forecast.[28]

19. Mr Chote, Chairman of the OBR, provided us with several arguments for the weakened forecasts for business investment. He noted that in the short term the OBR had forecast a "significant downward revision to the forecast for investment growth in 2012, which is largely a reflection of the big decline in the fourth quarter of 2011".[29] He explained that the forecast for business investment for the later years in the forecast period had been reduced for two reasons. First, the OBR had looked again at the health of the corporate sector's balance sheet, and its sense was "that official statistics may be overstating the support that the amount of cash that appears to be on corporate balance sheets might provide to investment in the longer term".[30] Secondly, Mr Chote stated that the OBR had compared the current recovery with that in the 1990s. This had led it to forecast:

    Investment picking up by about 40 per cent over the five-year forecast horizon, which compares with about 50 per cent in the equivalent period of the recovery in the 1990s. Given what is going on with fiscal consolidation, credit conditions, et cetera, a robust recovery in investment that is somewhat weaker than in the 1990s seems to us to be a reasonable balance.[31]

20. During our inquiry, we have heard criticism of the OBR's proposition that the proportion of the current corporate cash surplus that would be available for investment was a key restraint on investment. Mr Chote referred to work by the OBR which suggested that not all of the cash surpluses available to UK-based corporates are necessarily available for business investment. From previous work by the OBR it is known that UK corporates in 2010 held the majority of their cash in bank accounts at foreign banks.[32] The ONS only knows in aggregate corporates' cash holdings in foreign banks. It does not have a breakdown between financial and non-financial corporates. This may be important, as non-financial corporates' cash holdings might be used for business investment, but financial corporates, such as hedge funds, are unlikely to use the bulk of their cash holdings for that purpose. In the past the OBR has fallen back on a rough estimate of the breakdown of the split between financial and non-financial corporate. At the moment, the ONS estimates that roughly 80 per cent of UK corporate cash in foreign banks is held by non-financial corporates. However, the OBR has now done some work of its own on this. It has concluded that the 80/20 split may be an overestimation of the amount held by non-financial corporates. Mr Chote explained that:

    The ONS is using a Bank for International Settlements survey, which records the claims of UK bodies on those foreign financial institutions. It attributes about 80 per cent of those to the UK corporate sector that you might anticipate would be likely to invest them. Our concern is that a smaller proportion of that than 80 per cent may be with the sorts of companies that are likely to invest this in capital. More of it, for example, might be held in by hedge funds and therefore it is less likely to be used for capital investment. That 80:20 split was come up with quite some time ago, since when the growth of non-bank financial institutions has been rather great. That concern is what primarily underlies the view that the apparent cash piles that lots of companies are sitting on may not be, as it were, just waiting to go out and be invested in capital investments, as the official statistics might suggest.[33]

Dr Jens Larsen, RBC Capital Markets, said on the other hand that he did not think "that cash is the key constraint on corporates; the key constraint on investment now is the demand outlook".[34] This view was expanded upon by Mr Bootle, Capital Economics, who told us that:

    I doubt very much whether cash will be the constraint. After all, if we are talking about large companies that find they do not have enough retained earnings and that they have got access to bond markets or equity markets—indeed, better access to the banks than SMEs have—I would be surprised whether that is really a substantive issue. When you look at their cash balances, they are very high by historical standards. The question simply is: do they want to invest? That is primarily about the overall environment of aggregate demand and the confidence that they have in the future.[35]

21. There was also some concern expressed to us about the OBR's overall forecast for business investment. Dr Hilliard, when asked about the OBR's assessment for business investment, told us that he was:

    [...] shocked by how weak its forecast is for this year. It could possibly be a little bit higher. Then, when we move to the medium term, it is relying on business investment to drive growth. Maybe I am just a good old English pragmatist. I think it will be somewhere between the two. My worry in the medium term about the growth outlook is that we will be disappointed in several demand components and that the investment one looks too weak at the moment, and a little bit too strong in the medium term.[36]

Dr Larsen also outlined his reservations about the OBR's forecast. He noted that looking further out, the whole forecast was one about a "beautiful rebalancing with much stronger business investment and much stronger net exports" and that "one can get a little worried that that will actually happen".[37] However, he stated that "The OBR has moved in the right direction [...]. The reliance on this business investment recovery is less than it was in November [2011], and November was less than it was before, so the forecast makes more sense to me".[38] When we challenged Mr Chote on the strength of the OBR's business investment forecast in later years, he replied:

    What we have is a relatively robust recovery. It is something that is increasing as a share of GDP, which we would expect during the recovery phase, but we have a less dramatic increase than we did in the 1990s, which seems appropriate given the headwinds that the economy faces at the moment. However, I would be the first person to say that if we look at this chart in nine months, the numbers may look different again. We have to address the evidence as it comes in.[39]

22. The OBR now forecasts that the growth in business investment will be slower than it thought in November 2011. One of the OBR's explanations for this weakening was the results of further research undertaken by the OBR into the official ONS figures on the availability of cash for investment by firms which suggested that ONS figures over-estimated the amount of cash held by companies that are likely to invest in capital. We have heard conflicting evidence on this argument. In view of the importance of business investment in the GDP forecast, we therefore recommend that the OBR, in conjunction with the ONS, examine its work in this area with particular care.



23. Credit conditions for businesses continue to appear strained. The OBR's Economic and fiscal outlook sets out the extent to which bank lending continues to be weak:

    Bank lending to private non-financial companies (PNFCs), especially small and medium-sized enterprises (SMEs), continue to be weak with the annual growth rate in November at -2.1 per cent for all businesses and -6.1 per cent for SMEs. Lenders reported especially weak demand from SMEs at the end of 2011, citing reduced business confidence.[40]

24. We questioned witnesses about the extent to which a continued lack of bank lending was constraining economic growth. Mr Chote stated that the amount of time it would take for credit conditions to normalise "is one of the key factors that explains why you have a relatively slow recovery, but it is also one thing that we have factored into deciding when the growth rate of potential GDP is likely to get back to its long-term growth rate."[41]

25. Dr Hilliard, however, argued that a lack of bank lending was not constraining growth in aggregate a great deal.[42] He suggested that, for larger firms at least, the supply of credit from banks was unlikely to be the primary factor suppressing investment, noting:

    The corporate sector is flush with money. [...] Lending is obviously important for SMEs—vital in the medium term—but in terms of the dynamic of a recovery, the larger companies are well able to power the recovery if they want to. I think the issue is much more one of confidence—trying to dispel uncertainty—in two ways. One is the uncertainty of demand, which is pervasive and may be reduced if the eurozone crisis continues to stabilise. The other is the uncertainty of funding. It is puzzling that we have such a large cash pile. It is not just a UK phenomenon; it is in all the major western economies. During the deepest part of the recession, companies felt they had to go to the bond markets to get funds, because banks were at their most cautious at that point. Even though banks subsequently reopened their lending to large companies, I think large companies learned that lesson, and continue to do so. So, there is uncertainty both on the liquidity side of funding and on the demand side.[43]

26. Mr Bootle largely supported Dr Hilliard's point of view with respect to large corporates, agreeing that they "have got substantial cash piles and are not heavily dependent on the banks, and they could step up investment even if there were not any renewed willingness of banks to lend."[44] He went on to argue however, that the conditions faced by SMEs were rather different, and that both supply and demand issues were relevant:

    As far as the SMEs are concerned, it is a question of both demand and supply, and it is very difficult to disentangle them. There is considerable survey evidence to the effect that the terms facing small companies that wish to borrow from banks are substantially worse—tighter—than they were some years ago. [...] Although it is often difficult to disentangle demand and supply, the key indicator is what is happening to margins. If you think the problem is lack of demand, you should find banking margins under downward pressure. You do not see that, actually. You see banking margins under upward pressure. I think that is an indication that the banks feel that lending to SMEs is a pretty risky business, and they are not as keen on it as they might be.[45]

Mr Steve Hughes of the British Chambers of Commerce (BCC) agreed that SMEs were finding it particularly difficult to gain access to bank finance:

    We now have evidence through something called the SME Finance Monitor, which was the first independent, big survey of bank lending conditions conducted post-financial crisis. It shows quite clearly that younger, high-growth, smaller businesses find it much more difficult to access finance.[46]


27. On 19 March 2012 the Government announced details of the National Loans Guarantee Scheme (NLGS), under which it will guarantee loans to participating banks, which will allow them to borrow at a cheaper rate. The scheme will be limited to businesses with turnover of less than £50 million. Participating businesses will receive the entire benefit of this cheaper funding for banks through a reduction of 1 percentage point in the cost of bank loans. The Government has put in place the following measures to try to ensure that participating banks pass on the full benefit of their lower funding costs to SMEs:

    As a condition of participating in the scheme, the banks have agreed a monitoring framework with the Government. All banks will have to submit quarterly reports containing data on the loans they have made under the scheme, and demonstrate that they are passing on all the benefit of the guarantees to businesses. The scheme will also be independently audited.

Participating banks will pay a fee to the Government. The first tranche of NLGS funding will be £5 billion, with the timing and size of subsequent tranches being determined by demand up to a total of £20 billion.[47]

28. We asked witnesses whether they felt that the NLGS would be successful in addressing some of the structural problems within the SME funding market, and whether it would increase net lending overall. Mr Chote stated that the OBR's expectation was that the first £5 billion tranche of the scheme "would lead to some rebalancing in lending towards SMEs from other borrowers," but that the OBR was "less convinced that it would have a significant impact on overall lending and therefore on the economic forecast."[48]

In response to the question of whether a larger initial tranche would have had an impact on the economic forecast, Professor Nickell stated that if the Government had proposed guaranteeing £20 billion of bank funding up front, the OBR would have had to "think seriously" about what impact that would have, but "with £5 billion, you do not have to think very hard about the additionality, because £5 billion is just not very big." He argued that with the scheme as currently designed, "the actual increase in lending you get—the bang for your buck—is not very great."[49]

29. Mr Chote, however, noted that it was not necessarily the Government's intention to increase aggregate investment through the NLGS.

    The Government are in part trying to do this, presumably, to help SMEs specifically, and then as a contribution maybe as well to aggregate levels of business investment. There is the broader question of whether that also substitutes for lending to non-businesses. It is for them to decide what their success criteria are for this policy. They might be happy if it is showing up as an SME effect, because they are particularly interested in helping SMEs, and there is an offsetting effect elsewhere. We would argue that the likelihood of that is greater than the likelihood of its making a significant boost to aggregate lending and therefore to aggregate activity in the economy.[50]

The Government has stated that "The aim of the NLGS is to help smaller businesses obtain lower cost finance."[51] In his evidence to us, the Chancellor said that having "an impact on small business lending" is "exactly what it [the NLGS] is designed to do".[52]

30. A number of witnesses, however, argued that the scheme might not prove to be particularly effective. Mr Hughes thought that the scheme would have "little impact" and not be of "material benefit":

    It will make loans cheaper for some businesses, but those businesses are more than likely to be the businesses that would have been viable or deemed viable by credit scoring systems and allowed to have finance anyway. Ultimately, it is just giving them a bit of a bonus on the pricing of their loan. There are wider problems with the system that need to be addressed.[53]

Professor Nickell of the OBR also cast some doubt on the impact of reducing loans to businesses by 1 percentage point, saying: "An SME line from a bank is often 8 per cent, 9 per cent or 10 per cent, and one percentage point is not huge".[54]

Mr Hughes raised the issue of whether the rapid launch of the scheme might hamper its effectiveness:

    State aid sign-off for the national loan guarantee scheme occurred on the Thursday; the banks signed up over the weekend and it was launched on the Tuesday. Somehow, all the bank relationship managers are meant to know and understand a scheme, so that when a business walks in after seeing it on the TV, they are able to explain to them.[55]

31. In his evidence to us, the Chancellor said: "I have made it clear that if the scheme is working and if the money is coming out of the door, I am prepared to look at increasing that £20 billion."[56] While this might address the issue of the scheme having an impact on aggregate lending, Mr Portes, Director of the National Institute for Economic and Social Research (NIESR), argued that it was "more a design issue than a quantity issue" that would prevent it from being particularly useful: "I would not say that they should have done 40 billion rather than 20 [billion] and that that would have had a wonderful effect. I do not think that that is particularly plausible."[57]

32. Dr Larsen said that a problem was that no one wanted to assume the additional credit risk of SMEs: "The banks are not keen to do it. The Treasury is obviously not keen, either. As you have explored on many occasions, the Bank of England does not think it belongs there. So it is very difficult to find someone who will do it."[58] Mr Bootle noted that there was also a distinction between those SMEs who should be receiving credit and were not and those that should probably not receive credit in any case, but he argued that that there was now a shortfall of credit from banks to SMEs that should be receiving loans:

    It is certainly not the case that all SMEs that want access to bank credit should be granted it. Sometimes you listen to groups lobbying on behalf of SMEs and you get the impression that the banks must be completely off their heads—that there is not really a risk. Of course, we all know from the evidence that lending to SMEs is extremely risky, but equally, that does not mean that the banks have not overreacted, too. That is to say, in being overly generous with credit overall in the run-up to the crisis, the banks have now been under-generous with particular sorts of credit as a direct reaction to the earlier behaviour.[59]

33. In evidence to us, the Chancellor noted the complexity of trying to establish a scheme like the NLGS:

    It is a very complex operation to try to guarantee lending to banks, which is then passed on from the banks to small businesses. When I launched the scheme in Parliament, I said that I did not expect that we would get it 100 per cent right when we started and that we would have to improve it as we went along. I am really pleased with the way it has been launched, and we have not found any problems yet, but I am certainly prepared to increase its capacity if we can show that it is getting to those small and medium-sized businesses.[60]

34. We welcome the Chancellor's commitment to increase the capacity of the National Loans Guarantee Scheme if it proves to be successful. We note that oversight of the Scheme through monitoring and reporting by participating banks, and also an independent audit, has been put in place to ensure that banks will pass on the full benefit of lower funding costs to SMEs. We expect there to be full transparency about the monitoring of the Scheme and the results of the audit. We will require detailed evidence from the Treasury to show that these guarantees have had the effect intended, and that the scheme is operating in such a way that banks do not retain any benefit, as the Treasury intended.

35. The stated aim of the NLGS is to decrease the price of loans to SMEs, and evidence we received suggested that most respondents did not expect the scheme to have a material effect on net lending. However, if the interest rate on a loan to a given SME is reduced by one percentage point this, other things being equal, will make that SME less risky. Therefore, if banks maintain their existing risk appetite towards lending to SMEs, the reduction in risk brought about by the NLGS will encourage them to increase lending.

36. We remain concerned that while the Scheme should reduce the price of loans to some SMEs, and at the margin may increase the quantity of loans available to them, it was not designed to solve the problem that many SMEs who may be reasonable credit risks are unable to access bank funding at all in the current unusual market conditions. Access to finance for SMEs remains a significant problem. Whilst these exceptional market conditions continue, the Government should regularly publish its own estimate of the degree of dysfunctionality of the market, with proposals for remedy.

37. The flow of credit to SMEs would be significantly increased by greater competition in the banking sector. We urge the Government to give greater consideration to the promotion of competition in banking.


38. The Budget announced £200 million additional funding for the Business Finance Partnership (BFP) and a commitment to review and implement the recommendations of the industry review of non-bank lending chaired by Tim Breedon.[61]

The BFP aims to increase the supply of capital through non-bank lending channels and to help diversify the sources of finance available to businesses. The Government initially made available £1 billion to invest through these channels, which was increased to £1.2 billion in Budget 2012. The initial focus of the BFP is on co-investment with the private sector through loan funds that can lend to mid-sized businesses in the UK.[62]

The report Boosting Finance Options for Business was published on 16 March 2012 and contains a set of proposals put forward by a taskforce, chaired by Tim Breedon, CEO of Legal & General plc, to widen access to new and alternative sources of finance, particularly for SMEs.[63] The key recommendation of the report were:

  • The creation of an alternative point of contact to the banks for information about raising finance. Industry to establish a kitemarked Business Finance Advice network;
  • A single brand and delivery agency to increase awareness and enhance delivery of the government's range of SME finance programmes drawing on international examples;
  • Opening up access to capital markets funding for smaller companies through the creation of a new aggregation agency to bundle SME loans. An in-depth feasibility study led by AFME [Association for Financial Markets in Europe] is the first step in this process. Programmes also to standardise and promote private placements, mezzanine and export finance, and encourage retail investment;
  • Stimulation of the retail investor base for public bonds;
  • Markets for innovative products including mezzanine finance and peer-to-peer lending to be considered for investment by the Government's Business Finance Partnership;
  • Reinforcement of prompt payment, led by companies in the Government's supply chain. Support for greater use of invoice discounting to fund payment gaps, including use of electronic trading platforms;
  • Encouragement for large businesses to utilise supply chain financing to invest in smaller suppliers, and
  • Government and industry to review impact of international prudential regulation such as bank and insurance capital rules on the supply of SME finance.[64]

39. We asked witnesses for their views on some of these initiatives. Dr Larsen welcomed the BFP, saying:

    That is a worthwhile initiative. It is difficult to get scale in that, but enabling a system of financing that does not rely entirely on the banking system seems a very good idea. It will eventually enable a broader set of investors, including pension funds and insurance companies, to invest not just in SMEs, but in a broader range of assets on the infrastructure side rather than in Government bonds.[65]

He also noted the difficulty in increasing the size of these schemes so that they could become an alternative funding mechanism on any meaningful scale:

    The point is that the market does not exist. I think you could achieve scale eventually, but you have to have a group of investors that wants that kind of product and a group of corporates that is willing to go through the discipline that comes with the process. There is no doubt that market finance for businesses will be more expensive than bank finance was before the crisis. There is a chicken and egg problem: you need to establish a market—establish both demand and supply—and that is not easily done, certainly not in the current environment.[66]

40. In his evidence to us, the Chancellor highlighted the difficulty in trying to restart the market for securitised small business loans as suggested by the Breedon review, stating:

    Trying to restart the securitised market for small business lending is something that we are considering, but let's be clear: it completely shut because of the financial crisis. Securitised products were one of the main causes of the loss of confidence—people's lack of certainty about what was in them. Restarting it is not easy and I am not aware of any country that has successfully done this on a large scale since the crash. With small business lending, there is the particular challenge of people having enough information about the small businesses that are part of the package. Mortgages, at least, can be a bit more standardised. I am trying to crack that nut; it is a big challenge, but we are actively looking at it.[67]

41. SMEs face serious and often insurmountable problems in obtaining bank lending at reasonable rates. Non-bank lending could be a solution for some SMEs, although the market for such loans seems relatively unresponsive to apparent demand. The Breedon review suggests that there are problems both with supply and demand for non-bank financing, including a lack of knowledge amongst SMEs about available sources of such financing. The Government's efforts to examine non-bank channels for funding businesses are very welcome, but we note there is much work still to be done to establish large scale alternatives to bank lending for most SMEs. We recommend that the Government continues to pursue creative solutions, including those suggested by the Breedon review, to increase the level and availability of non-bank funding, and set out the results in detail in the Autumn Statement.

Export target

42. In his Budget statement, the Chancellor announced a new export target. He noted that "over the last decade our share of world exports shrank as Germany's grew. We sold more to Ireland than we did to Brazil, Russia, India and China put together". He argued that the UK's export performance "was the road to Britain's economic irrelevance" and said that the Government wanted "to double our nation's exports to £1 trillion this decade".[68] The Chancellor told us that the export target had been recommended by Lord Green, the Minister of State for Trade and Investment, who thought that it "would help lift the eyes of Government Departments to what more they could do to promote exports".[69]

43. Given that it is the balance of exports and imports (net trade), rather than exports alone, that contributes to economic growth, we asked the Chancellor why he had not chosen a net trade target. He replied "Because in the end we can have a more direct impact on the promotion of British exports. I think the net trade figure is more difficult for the Government to target."[70] He also confirmed that the export target was a nominal one.[71] While a nominal export target may be of some use in concentrating minds within Government, GDP growth will only benefit if the UK's net trade position improves as well, and that will require imports to grow less quickly than exports. We are therefore sceptical about the value of an export target without examining the overall current balance and will further examine this issue in our inquiry into global imbalances.

Forecasting the impact of the macroprudential tools

44. On 22 March 2012 the Governor of the Bank of England wrote to the Chancellor with the advice of the Bank's interim Financial Policy Committee (FPC) that the future statutory FPC should be given powers of direction over the following macroprudential tools:

  • The countercyclical capital buffer;
  • Sectoral capital requirements, and
  • A leverage ratio.

45. Given the potential impact on the economy of the use of these tools, we asked the OBR how they intended to forecast the impact of the use of the tools. Professor Nickell outlined how the OBR might react to arrival of the FPC by providing the following example:

    I suppose that the way one might think about doing it is that if you constructed a forecast—this is ignoring the new committee—and you discovered in the context of that forecast that you had very rapid rises in house prices and rapid expansions in credit, we would probably say, "Ah, but that will not be allowed to happen", because we suspect that the committee will intervene to restrict the rate of credit expansion, either by using capital requirements and/or direct regulation of things such as loan-to-value ratios. I can see that that would be how we might proceed on that score.[72]

He did note, however, that rapid credit growth was not a concern for the OBR at the moment. He stated that "In our current forecast, we do not have such a growth in credit that we feel that the new committee [FPC] will be intervening any time soon".[73] Both Professor Nickell and Robert Chote emphasised that information from the FPC about how they would use the tools would be helpful in determining how the OBR's forecasts would change.[74]

46. The powers of direction to be granted to the statutory Financial Policy Committee of the Bank of England are likely to have a significant impact on the economy when used, and the possibility of their use will have to be taken into account in the forecasts of the Office for Budget Responsibility. We recommend that the FPC and the OBR work together as the macroprudential tools are developed to ensure that they are adequately reflected in the OBR's forecasts. We will inquire into the new macroprudential tools. Among issues we will examine is whether they will be as effective in ameliorating downturns, as well as limiting upswings, in credit cycles.

Monetary Policy

47. Monetary policy in the United Kingdom is currently exceptionally loose. The Bank of England's Monetary Policy Committee (MPC) lowered the official Bank rate to 0.5 per cent in March 2009, and it has not been raised since.[75] In that same month, the MPC agreed to begin quantitative easing,[76] which by the time of the Budget 2012 had increased to £325 billion, an increase of £50 billion since the November 2011 forecast.[77] In his Budget statement, the Chancellor announced that:

    Inflation is expected to fall throughout the period, from 2.8 per cent this year to 1.9 per cent next year, and then 2 per cent by the end of the forecast period. I am today writing to the Governor of the Bank of England to reaffirm the consumer prices index inflation target of 2 per cent. The Government's credible and responsible fiscal policy allows the independent central Bank to pursue an activist monetary policy consistent with targeting low inflation. I confirm that the asset purchase facility will remain in place for the coming year.[78]

The OBR's March 2012 Economic and fiscal outlook highlighted the importance of inflation falling, and the role of monetary policy in closing the output gap:

    An important anchoring assumption in our forecast is that monetary policy succeeds in bringing inflation back to target over the forecast horizon. Coupled with a view that domestic price pressures (well-represented by the output gap) are the most important driver of inflation in the medium term, this implies that monetary policy will act to close the output gap over time by stimulating or softening aggregate demand.[79]

Mr Chote emphasised to us that:

    The main policy driver remains the accommodative stance of monetary policy. You have had some change in market expectations of where interest rates would go and, implicitly within that, what will happen to QE, but the foot clearly remains firmly on the accelerator on that score. In terms of the policy support, that will be a key one.[80]

However, the OBR also noted in its Economic and fiscal outlook that there were limitations as to what monetary policy could achieve. It explained that its forecast of the size of the output gap meant "Economic activity remains around 0.5 per cent below potential in the final year of the forecast", and that this partly reflected "the limitations of what monetary policy can do to encourage the uptake of spare capacity".[81] It also said that "Whether the second and third rounds of quantitative easing will provide as much support to the real economy as the first remains a risk to our central forecast".[82]

48. In our hearing on the February 2012 Inflation Report, we explored with MPC members how effective the second and third rounds of quantitative easing (QE) would be. Dr Adam Posen, an external member of the MPC, told us that that "except for that additional fillip from panic response, which thankfully is not part of our programme now, I expect QE to be just as effective as it was."[83] He explained that the additional fillip was that "there is one major difference in QE now versus, say, in 2009, which is that we do not have the outright lock up and panic in the markets, and there is an added benefit, in the sense of being in a bad situation, that QE alleviates that problem and adds confidence".[84] The Governor of the Bank of England told us that what was needed now was "patience":

    We have done the things that are necessary. We have to keep our eye on policy. We will adjust asset purchases in either direction as seems appropriate. Gradually I hope we will be able to raise interest rates back to a more normal level, as the economy recovers. But after a financial crisis of this kind, the main lesson of history is that, yes, you need to take quick action; you need to get hold of the banks and restructure them so that they can once again start to perform their normal function, but a large element of all of this is patience. It does take time to recover from a crisis of this kind.[85]

49. Dr Larsen told us that he thought "the strategy that is in place—the fiscal strategy, but also the monetary complement—overall makes a lot of sense, and it's certainly a strategy that has been understood in the market".[86] He also noted that "if you look at the OBR's forecast, it takes the full horizon to close the output gap; that would mean expansionary monetary policy for a very sustained period of time. So I think the notion that expansionary policy, monetary policy alone, can do this, is probably flawed".[87] Dr Hilliard seemed dubious about whether the further rounds of quantitative easing would be as effective as the first. He argued that:

    What I distinguish between QE1 and QE2 is that, when QE1 was launched, the world was a very, very dangerous and frightening place. The Bank of England embarked on QE not knowing what its impact would be, but having run out of conventional policy tools. What is a little troubling now is that we are seeing the Bank of England describe its continuing use of QE as a conventional tool, and that makes it rather too relaxed in using it. I do not think that the impact of QE2 will be as powerful as QE1. I know that that is not what the Bank of England believes. I do not see immediate inflation risks or anything like that, but there are distortions in the gilt market from doing that which should not be ignored.[88]

50. Mr Portes was clear regarding the consequences of the fiscal and monetary stance of the Government:

    When we talk about the output gap here, the OBR is basically talking about unemployment. So what we are saying is that we are allowing unemployment to remain much higher than the NAIRU and structural level for a very long period. We know that that does long-term social and economic damage and damages potential growth and output going forward. That is the case for doing something.[89]

51. While the Government maintains the current tight fiscal profile, monetary policy will remain the main tool for stimulating demand in the economy. The Bank of England appears confident of the efficacy of continued quantitative easing, and the Governor urged patience. We note from the OBR forecasts that despite its current extremely accommodative stance, monetary policy alone will be unable to close the output gap over the forecast horizon, with long term consequences for the recovery. Bearing in mind the risks of unwinding, we will continue to monitor the impact of loose monetary policy and the effectiveness of quantitative easing in our hearings with the Monetary Policy Committee and the Financial Policy Committee. We will also continue to explore the effectiveness of loose monetary policy on the economic recovery.


52. The policy of extremely lax monetary policy has not been without criticism. Under this policy, savers receive a far lower return on their savings than under more normal conditions. Meanwhile the returns that new pensioners will receive on their annuities have also been badly affected. When the latest round of quantitative easing was announced in February 2012, the National Association of Pension Funds, while understanding the reasoning for further quantitative easing, stated that:

    People who are retiring now are finding that annuity rates have been squashed by QE, and that they will get a smaller pension than they expected. Retirees who get locked into a weak annuity will find that the Bank's money printing leaves them out of pocket for the rest of their lives.[90]

Saga Group has explained that even those that don't buy annuities, but rather enter into income draw-down pensions, would be affected by quantitative easing. They noted that if those retiring:

    decide not to buy the annuity but go into income drawdown instead, they will also be hit by QE because the amount of income they are allowed to take out of their pension fund is determined by the Government Actuary Department's (GAD) rates, which are themselves based on gilt yields. The more the Bank of England buys gilts, the lower gilt yields go which in turn means GAD rates fall and pension income has to be cut. Indeed, many people in income drawdown are now facing falls in their pension income due to the drawdown rules.[91]

53. We received several responses from MPC members when we raised these concerns with them. Mr Charlie Bean, Deputy Governor of the Bank of England (Monetary Policy), noted that:

    it might be useful to say a few words about the effect of asset purchase on pension funds, because a lot of the discussion tends to focus on one side of the story, the impact on annuity rates, and forgets the other side of the balance sheet, which is that, by design, asset purchases are supposed to drive up asset prices. That is why yields fall. There is a tight mathematical link between the two. While annuity rates might have been driven down by our asset purchases, at the same time the value of holdings in pension funds, in gilts, equities and corporate bonds, will have been driven up. So that compensates for the decline in annuity values—at least if a pension fund is in rough balance; if a pension fund has a significant deficit then that deficit is obviously widened.[92]

Mr Paul Tucker, Deputy Governor of the Bank of England (Financial Stability), acknowledged that there were redistributive effects from the current position of monetary policy, but strongly argued that despite these redistributive effects, the MPC's decisions had been correct. He explained the consequences, as he saw them, of not running a lax monetary policy in the following stark terms:

    I want to lean against this "savers get hurt". [...] If we were not, and had not been, running an easing monetary policy for the last three years or so now, this economy would have been destroyed. Savers are investors in the future. Savers would be hugely worse off had we not been supporting demand in the economy. I know, of course, that we have pulled down the discount rate and the rate of interest paid on deposit accounts is low. I understand and have great sympathy for the effect of that on savers, because many of them did nothing to bring about this dreadful crisis, but I promise you they would be even worse off had we not supported demand to the extent that we have. So the distributional effects are important, but given the gravity of this crisis—excuse me if this is an unfortunate expression—they are second order to where we could have been. We could be in ruination and we are not there, because of the measures that have been taken, not only by our own central bank but other central banks around the world, and they dominate the distributional effects, I would say.[93]

These arguments were also echoed by the Chancellor when we asked him what the Government was doing to protect pensioners, and especially those on income drawdown.[94] Referring to the Governor of the Bank and Mr Bean, he stated that:

    Policies like quantitative easing have increased asset prices, including the value of pension pots. So there is a benefit, even to savers with pension pots, of asset price increases and it cannot be in the interests of anyone in this country that we have very high interest rates that throttle off any recovery and lead to higher unemployment.[95]

54. Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with 'drawdown pensions' and those retiring now. The Bank of England has argued that some of those effects may be mitigated by the increase in asset prices stimulated by quantitative easing. While the aggregate of savers and pensioners may have received some benefit from higher asset prices, there will be many individuals who will not have benefited. The Bank of England, after, where appropriate, consultation with the Treasury, should provide its estimate of the overall benefit and loss to pensioners and savers from quantitative easing. It should, in addition, estimate how that balance changes depending on when an annuity was purchased, using the following three dates: immediately before the start of the crisis five years ago; immediately after the introduction of quantitative easing; and now. We further recommend that the Bank of England, and particularly MPC members, improve upon their efforts to explain the benefits of the current position of monetary policy to those affected by the redistributive effects of quantitative easing.

55. We recommend that the Government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing, and if appropriate consult on them at the time of the Autumn Statement.


56. Given the Government's commitment to its current policy of fiscal discipline and monetary policy activism, we asked witnesses whether there should be changes to the mix of monetary and fiscal policy. A variety of views were expressed to us. Dr Larsen noted that:

    So the strength of fiscal consolidation, the commitment to that, combined with the fact that the Monetary Policy Committee can respond to a slowing economy by expanding monetary policy, is very well understood in the gilt market, and very widely appreciated among the people I meet in the international investor community. So I think that's absolutely essential.[96]

He warned that while "There is a very real question of whether you could have chosen a different path, where you had perhaps a little bit less fiscal tightening and perhaps a little bit less expansion of monetary policy", to his mind "that discussion was very relevant a year or two ago when that strategy was set out". At present, Dr Larsen concluded, "you wouldn't want to deviate from the current strategy".[97] Mr Portes disagreed with this position. He told us of Dr Larsen's position: "I call that the Macbeth argument for carrying on. You know the quote from Macbeth: we are so stepped in blood, we must carry on to reach the other side. My view is that you do not enhance credibility by sticking with a strategy that does not appear to be working."[98] However, Mr Bootle noted that:

    I have written, right from the beginning of this Government, that I thought that their plans were fiscally too tight. However, the idea that having set those plans out, you can now announce some massive splurge in public spending or tax reductions that would not have consequences in the market, I find really rather bizarre.[99]

57. Dr Hilliard provided us with the following description of how he viewed the current policy position, emphasising the importance of fiscal credibility, and the role of quantitative easing:

    I think, really, the lines between monetary and fiscal policy in this kind of world are very blurred, and in fact the credibility of fiscal policy is actually delivering a monetary policy impact. [...] we are getting very low gilt yields, which I think are a direct result not only of QE but also of the fiscal credibility, so that is giving us a low yield curve. That is lowering financing costs for all entities in the UK, so to that extent I think the two are a marriage; and I don't think any fine tuning of fiscal policy would make a great deal of difference. I think actually we have to become reconciled to a fairly slow growth path.[100]

However, Mr Portes strongly disagreed with this conclusion. While he acknowledged that quantitative easing was having "some depressive effect" on gilt yields, he argued that it was wrong to suggest that the extremely low level of gilt yields were due to fiscal credibility.[101] He argued:

    We have fiscal credibility. We have always had fiscal credibility in the sense that nobody thinks that the UK is not going to pay its debts over the medium to long term. Our analysis, which is pretty simple and which can be easily replicated by the Treasury or by Mr Hilliard, shows that the fall in gilt yields is primarily driven by economic weakness. It has tracked what has happened in the US. It mirrors movements in equity markets and the pound. The analytical evidence is pretty strong.[102]

Dr Hilliard, responding to Mr Portes' comments, told us that he agreed "in the general sense that expectation theories of the yield curve do drive it. If we saw high yields come through because of a general improvement in the economic background, the Bank of England would not react to that. It would applaud it".[103]

58. When we asked the Chancellor whether he was committed to closing the output gap, he replied:

    I am the first person who wants to reduce unemployment and youth unemployment. Of course, I want to close the output gap as well. I suspect—you can ask the Governor of the Bank—that he would not be running such a loose monetary policy if he thought that the output gap was closed. He is interesting on the challenges of trying to calculate the output gap. Of course, we are in the recovery phase and what the OBR said this year and last autumn is that the impact of the financial crisis or financial crash, which, let's be clear, is on some measures the worst in British history, has had a real effect on the pace of recovery. Chuck in the external factors, such as the euro crisis at the back end of last year and the oil price, and those are additional headwinds. I can tell you that I am doing everything that I possibly can to speed up the recovery and ensure that the accomodative monetary policy can work for as long as possible. The idea that I am tolerating this is not true; I am doing everything I can to speed up the recovery.[104]

59. Witnesses have expressed reasonable differences about the current mix of fiscal and monetary policy. There is also some concern that monetary policy is reaching the end of its effectiveness in accommodating the present tightness of fiscal policy. We will continue to monitor the Government's and the Bank of England's approach in this area.

The output gap

60. The output gap is defined as the difference between the potential output of the economy and the actual level of activity within the economy. When the output gap is negative, there is less activity than potential. The output gap is unobservable since the potential output of the economy is unmeasurable. Yet the output gap is used as a primary tool in assessing the success of the fiscal policy. It is simply an estimate based on the judgement of economists and is inherently extremely imprecise. The size of the output gap determines how much of the fiscal deficit at any given time is cyclical and how much structural: in other words, how much will disappear automatically, as the recovery boosts revenues and reduces spending, and how much will be left when economic activity has returned to its full potential. The narrower the output gap, the larger the proportion of the deficit that is structural and the less room for manoeuvre the Government will have against its fiscal mandate, which is set in structural terms (see paragraph 75). The output gap can also be used to assist with the assessment of the potential for inflationary pressure on prices if demand cannot be met at a given level of capacity.

61. In its March 2012 Economic and fiscal outlook, the OBR estimated that the output gap was not as deep as it had thought in November 2011 (-2.5 per cent vs. -2.8 per cent of potential GDP). This followed a revision in November 2011 from -3.1 per cent to -2.6 per cent of GDP which was based on an assessment that there has been a persistent and significant slowdown in potential output growth following the financial crisis.[105] The OBR says that it reduced its estimate of potential output growth as a result of data released since November 2011.[106]

62. Given that the fiscal mandate is based on a cyclically adjusted balance, the estimate of the output gap will be a source of uncertainty in measuring whether the fiscal mandate will be met. In its March 2012 Economic and fiscal outlook the OBR highlighted the implications of this uncertainty in measuring the output gap:

    The biggest risk to the achievement of the mandate is that we again need to revise down our estimates of future potential output. If the output gap was around ¾ per cent of potential GDP narrower or rather the level of potential output ¾ per cent lower, then in our central forecast the Government would no longer be on course to balance the cyclically adjusted current budget in 2016-17.[107]

Mr Chote also emphasised to us the difficulties in measuring the output gap and the range of alternative estimates that existed:

    It is an extremely hard thing to measure. There is enormous uncertainty about it. We take great care to report the range of views on the size of the output gap and the range of views on the evolution of potential.[...]we would be the first to say that it is an extremely difficult task, and it involves elements of art as well as science.[108] [...]

    The big difficulty with the output gap is that there is never a final correct answer to compare it to because it is not a directly measured variable. [...]If you look at the range of alternative estimates that we cite here, we are in line with the average at about 2.7 per cent for 2011. The range varies from -½ to -4 so that gives you some sense of the variability. [109]

63. Given the risk to the fiscal mandate from a change in the size of the output gap, we asked the panel of experts whether they believed the OBR's estimates of spare capacity. Dr Larsen responded:

    I think the OBR's estimate of the output gap is reasonable. I thought the change they made in November when they reduced the level of potential output - the rate at which the economy can grow substantially in the near term - was the right judgement. I am a little bit more sceptical than them about the return to a normal growth rate.[110]

Mr Portes, however, disagreed, stating:

    I think the OBR is being too pessimistic. It is relying too much on survey-based indicators of capacity utilisation. I do not think it is credible to say that firms have only less than half a per cent of spare capacity, within firms, I mean, given the current levels of employment, which is what the OBR's estimates are. It is essentially saying that firms, given their current levels of employment, are running pretty much at full capacity, and I find that quite difficult to believe.[111]

Mr Bootle, while also recognising the difficulties of estimating the output gap, considered where one should allow the margin of error to lie:

    I suspect that the OBR is seriously underestimating the size of the output gap. However, given that this is very uncertain, we need to ask ourselves what attitude should we take to uncertainty; where should we allow the margin of error to lie? That is to say, is there a sense in being too optimistic about the output gap? From the point of view of fiscal conservatism, it is probably the right thing to do—to run with an estimate of the output gap which is on the low side. I suspect that it is on the low side. If it is, the result will be that we will find that the economy can grow much further, much. faster and the fiscal position will come better earlier and more than we actually expected. [112]

64. In our Budget Report of 2011, we recognised the importance of the estimates of the output gap for assessments of the size of the structural deficit.[113] However, the OBR told us "that it was hard not to take some view implicitly or explicitly about the amount of spare capacity that there is at the moment and the growth rate of potential over that five year period".[114]

65. The OBR relies heavily on the output gap in order to assess whether the Government is on course to meet its fiscal mandate. However, as an unobservable measure, the output gap is prone to great uncertainty and frequent revision. There is therefore a risk that there will be unwarranted changes in fiscal policy as a result of reliance on it. We recommend that the Treasury ask the OBR to evaluate other, supplementary, approaches.

14   OBR, Economic and fiscal outlook, March 2012, p 8, para 1.22 Back

15   OBR, Economic and fiscal outlook, March 2012, p 9, para 1.26 Back

16   Q 321 Back

17   Q 119 Back

18   Q 120 Back

19   Q 322 Back

20   Office for Budget Responsibility, Economic and Fiscal Outlook, March 2012, p 175, para 5.42, "Scary Oil," Nouriel Roubini, Project Syndicate, 15 March 2012 Back

21   Q 13 Back

22   Q 14 Back

23   Q 122 Back

24   Q 22 Back

25   Q 25 Back

26   OBR, Economic and fiscal outlook, March 2012, Cm 8303, p 56, Table 3.4; Business investment is forecast to make up a third of the GDP growth figure that year. Back

27   OBR, Economic and fiscal outlook, March 2012, Cm 8303, p 55, para 3.56 Back

28   OBR, Economic and fiscal outlook, March 2012, Cm 8303, p 11, Table 1.1 Back

29   Q 8 Back

30   Q 8 Back

31   Q 8 Back

32   OBR, Economic and fiscal outlook, November 2011, Cm 8218, p 78, Box 3.5 Back

33   Q 61 Back

34   Q 141 Back

35   Q 142 Back

36   Q 140 Back

37   Q 141 Back

38   Q 141 Back

39   Q 17 Back

40   Office for Budget Responsibility, Economic and fiscal outlook, 23 March 2011, p 54, para 3.52 Back

41   Q 33 Back

42   Q 123 Back

43   Q 123 Back

44   Q 124 Back

45   Qq 124-125 Back

46   Q 202 Back

47   "Chancellor launches scheme to boost small business lending", HM Treasury press release 24/12, 19 March 2012 Back

48   Q 50 Back

49   Q 55 Back

50   Q 56 Back

51   HM Treasury, National Loan Guarantee Scheme, Frequently asked questions, 20 March 2012 Back

52   Q 288 Back

53   Q 204 Back

54   Q 60 Back

55   Q 203 Back

56   Q 288 Back

57   Q 127 Back

58   Q 128 Back

59   Q 130 Back

60   Q 288 Back

61   HM Treasury, Budget 2012, HC 1853 (Red Book), p 44 Back

62   http://www.hm-treasury.gov.uk/bfp.htm Back

63   http://www.bis.gov.uk/businessfinance Back

64   http://www.bis.gov.uk/businessfinance Back

65   Q 131 Back

66   Q 132 Back

67   Q 300 Back

68   HC Deb, 21 March 2012, Col 797 [Commons Chamber] Back

69   Q 326 Back

70   Q 327 Back

71   Q 329 Back

72   Q 40  Back

73   Q 40 Back

74   Qq 40, 42 Back

75   Bank of England, http://www.bankofengland.co.uk/monetarypolicy/Documents/mpcvoting.xls Back

76   In the main, quantitative easing has been pursued by the purchase of gilts using newly created central bank reserves Back

77   Bank of England, http://www.bankofengland.co.uk/monetarypolicy/Documents/mpcvoting.xls Back

78   HC Deb (2010-12), 21 March 2012, Col 794 Back

79   OBR, Economic and fiscal outlook, March 2012, Cm 8303, p 50, para 3.43 Back

80   Q 15 Back

81   OBR, Economic and fiscal outlook, March 2012, Cm 8303, p 8, para 1.21 Back

82   OBR, Economic and fiscal outlook, March 2012, Cm 8303, p 50, para 3.44 Back

83   Oral evidence to the Treasury select committee, Bank of England February 2012 Inflation Report, HC (2010-12) 1867, Q 1 Back

84   Oral evidence to the Treasury select committee, Bank of England February 2012 Inflation Report, HC (2010-12) 1867, Q 1 Back

85   Oral evidence to the Treasury select committee, Bank of England February 2012 Inflation Report, HC (2010-12) 1867, Q 47 Back

86   Q 113 Back

87   Q 112 Back

88   Q 138 Back

89   Q 147  Back

90   National Association of Pension Funds, Pension funds react to latest bout of QE, Press release, 9 February 2012 Back


92   Oral evidence to the Treasury select committee, Bank of England February 2012 Inflation Report, HC (2010-12) 1867, Q 13 Back

93   Oral evidence to the Treasury select committee, Bank of England February 2012 Inflation Report, HC (2010-12) 1867, Q 84 Back

94   Qq 305-314 Back

95   Q 308 Back

96   Q 113 Back

97   Q 113 Back

98   Q 117; William Shakespeare, Macbeth, Act 3 Scene 4, "I am in blood / Stepped in so far that, should I wade no more, / Returning were as tedious as go o'er" Back

99   Q 117 Back

100   Q 116 Back

101   Q 117 Back

102   Q 117 Back

103   Q 138 Back

104   Q 287 Back

105   Office for Budget Responsibility, Economic and fiscal outlook, March 2012, p 40,para 3.23 Back

106   Office for Budget Responsibility, Economic and fiscal outlook, March 2012, p 40, para 3.24 Back

107   Office for Budget Responsibility, Economic and fiscal outlook, March 2012, p15, para 1.41 Back

108   Q1 Back

109   Q2 Back

110   Q112 Back

111   Q117 Back

112   Q117 Back

113   Tenth Report of Session 2010-12, para 32 Back

114   Q 1 Back

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Prepared 18 April 2012