Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 80 - 99)



  80. Productivity across the whole economy, manufacturing, service.  (Sir Andrew Large) I am aware, as we all are, that the productivity performance in manufacturing has been lower and disappointing compared with that in services and that is one of the areas of imbalance.

  81. What about the aggregate for the whole economy?  (Sir Andrew Large) Well, services plus manufacturing again has been disappointing compared with what we would all like.

  82. What is your favourite measure of aggregate productivity growth? Which one do you favour—total factor productivity or other measures?  (Sir Andrew Large) I have no particular favourite.

  83. I ask because obviously the big idea of this Parliament for the current Chancellor, quite admirable in his ambition, is to raise productivity growth and I am asking this question because obviously it has quite an impact on price levels. What would you say has been the trend over the last five years for aggregate productivity growth over the whole economy?  (Sir Andrew Large) Over the last five years, I do not have all the figures to my fingertips, but, if I am not mistaken, the rate of increase in productivity has declined, but trying to be careful about it, I cannot recall precisely where it was five years ago, but certainly over the last two or three years I think it has declined.

  84. When you sit on the Monetary Policy Committee you will obviously have to look at a lot of factors and one will be productivity growth. You say in the questionnaire, question 11[3], "The future [of UK productivity growth] is difficult to predict." Well, I think we can agree with all that, but when you are sitting on the MPC, what sort of assumptions are you going to be making from now on about future productivity growth bearing in mind that the Chancellor has set in place quite a few policies to try and improve the fairly dismal performance over the last five years? What are your assumptions when you are coming to a judgment on setting monetary policy?

  (Sir Andrew Large) Are you asking for a number?

  85. Yes.

  (Sir Andrew Large) I cannot give you a number.

  86. But you do look at the trends because this is quite important when determining what the general—

  (Sir Andrew Large) I understand the drift of your question and I absolutely agree with the importance of it and I also agree that it is very important to consider what possible changes there will be in productivity when coming to a decision, but what I am trying to say is that I cannot at the moment tell you what the numbers going into my assumptions are going to be.

  87. You say in the second part of your answer to question 11, "The promised gains from the IT revolution are in my view probable, and indeed empirically in various work environments they have been plain to see. But there is considerable uncertainty about how long it will take to see an improvement in the aggregate data." You have obviously given it some thought and you are properly being cautious in that reply, but I would like to try and understand what your views are. Do you think the "new paradigm", so-called, can yet be realised?

  (Sir Andrew Large) As I put in my written reply, this is a very, very difficult area.

  88. We understand that.

  (Sir Andrew Large) Well, okay, I will not repeat that then.

  89. You are going to be making decisions and you are going to be making serious judgment calls in this committee. Do not say that it is a difficult question because you get no prizes for that. What I am trying to understand is what your professional judgment is of the outlook for productivity, a number if possible, but if not a number, then at least some sense of how that is going to affect inflation, let's say, in the next two years?

  (Sir Andrew Large) Are you still asking the question about the new paradigm or have you moved?

  90. It is the same point.

  (Sir Andrew Large) I think the new economy, the information technology revolution and the speed with which it will work its way through to productivity improvements, one is going to need to be looking at all kinds of indicators that I have not been able to look at yet in order to see where, to what extent and how the productivity benefits are actually being transmitted into the way people are behaving and the decisions they make. That is one of the areas that is going to require judgment and I have not as yet looked at all the information in such a way that I can give you a cast-iron view on either the speed with which it is going to happen or the quantum. I appreciate your point and I agree with it that there are no prizes for saying it is very complex. I was merely trying to point out that, as with other, if you like, more or less discrete, but important changes in the economic environment throughout history, it is extremely difficult when they burst upon the scene to be able to predict quite what that is going to do and how it is going to affect people's behaviour in terms of productivity improvement. Now, I know that is not what you are looking for and you are wanting me to tell you something more concrete. I hope I will be able to do that when I have been able to look at all the different areas where productivity might be improved as a result of the IT revolution and the extent to which productivity does appear to have improved as a result of it.

  91. Would it surprise you to know that the Governor of the Bank of England, who is excellent in almost all other respects, is relatively uninterested in the impact of ICT on productivity numbers as it affects the price level? When you do get your feet under the table and are doing work inside the Bank, could I ask you whether you will ensure that some more serious work is done on this because in previous questioning of the MPC it is quite clear to me at least that this is not taken as seriously as it should be, so could I have your undertaking, Sir Andrew, that this is something you will look at? Perhaps when you come back and see us again you will have some better answers than have been provided hitherto, not by you, but by your now colleagues.

  (Sir Andrew Large) I have not. The answer to your question is obviously when I am in the Bank, I will keep on eye on the various areas I will look at and of course I will look at the one you have just asked about. Whether I will form a view that it is in any way different from the things they said, I do not know. I have not seen the details of what they said, but of course I will look at it and I think the area that has raised your questions is one that is extremely important. The difficulty is in actually knowing quite how you reach decisions as to what the productivity gains in that area are which have come about as a result of the IT revolution, but of course I will look at it.


  92. Well, we have all been wrestling with this issue, Sir Andrew, and in fact the Committee is looking into the productivity element in this coming Session, so if you are able to provide real clarity to us in the future, you will be the first, but there you are.  (Sir Andrew Large) Well, that is a challenge you have laid down for me, Chairman!

Mr Laws

  93. Sir Andrew, you will be attending soon your first MPC meeting.  (Sir Andrew Large) Yes.

  94. And you will be aware that over the last few months there has really been a change and a concern within the MPC about economic outlook and, in particular, a greater worry about the downside risks to the UK economy. How do you at the moment see the risks to the UK economy over the months ahead?  (Sir Andrew Large) Well, I did read of course the last minutes that were produced last week and I picked up exactly the same point that you have just made. If one is trying at the moment to look at the factors which are capable of influencing consumer spending, there are a number where, for one reason or another, the confidence that people have in the future may affect the way that their expenditure patterns take place. Already cited have been questions of house prices, for example, or levels of indebtedness, and there are many others, some of them in the international scene, the Stock Market, et cetera. Clearly one needs to make some sort of assessment as to collectively what all these different influences are going to do to behaviour, and behavioural judgments or judgments about how people will behave are ones which the MPC has to try to make. I hope that gives you some—

  95. Well, can I perhaps follow that up, which was very helpful, by saying that you obviously have seen the latest minutes of the September meeting of the MPC?  (Sir Andrew Large) Yes.

  96. At the end of that the Committee as a group unanimously signed off on the view that they wanted to keep interest rates obviously on hold.  (Sir Andrew Large) Yes.

  97. But they were ready to take further action by reducing rates if and when any additional demand was necessary.  (Sir Andrew Large) Yes.

  98. Do you agree with that view of the Committee as a whole, that the next move in interest rates is more likely to be down than up?  (Sir Andrew Large) Well, I read the minutes and I asked myself the question, "On the basis of just reading that," which is all I have been able to do, "what would I have done?" I came to the conclusion that I would have made the same decision.

  99. And you say you agree with the Committee's view that in terms of the risks of the next move in interest rates, and what they were saying is that they believe that the rates should remain on hold for the time being, but they think they need to be very conscious of the need to cut rates if the economy weakens and you would agree with that?  (Sir Andrew Large) With the qualification that I have not been privy to all the information that led them to that decision. All I have seen is what you have seen and the answer is yes.

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