Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 268 - 279)




  268. Good morning, Chancellor. It is a pleasure to welcome you to your first appearance before this Committee in the new Parliament. For the sake of the record, could you identify your team.

  (Mr Brown) Yes, Chairman. I also have a short set of opening remarks to enable you to know about the documents we have issued this morning. On my far right is Nick Holgate, who is the Director of Welfare Reform; next to me is Ed Balls, who is the Chief Economic Adviser to the Treasury; on my immediate left is Gus O'Donnell, who is the Managing Director for Macroeconomic Policy and International Finance; and on my far left is Nick Macpherson, who is the Managing Director for Public Services. Could I just say by way of helping the Committee, that in addition to our main Pre-Budget Report, I have published a set of additional consultation documents on issues ranging from our new research and development tax credit for larger firms, to new measures for the environment. On Thursday we will be publishing our final Pre-Budget Report consultation document which will set out our new approach to tackling child poverty, combining improved children's benefits with better education provision, greater support for parenting and encouragement of voluntary, community and charitable organisations crucial to family and child support. Can I also tell the Committee that, in line with our policy of transparency and openness, at 9.30 this morning we published the concluding statement of the IMF's 2001 Article IV Consultation on the UK economy and we circulated copies to the Committee this morning. It may help the Committee to know that today also saw the publication of the latest inflation figures, showing inflation down to 1.8 per cent, which is the lowest inflation since 1963.

  269. Thank you very much, Chancellor. I will start with an introductory question on the general economy. Should we be confident that the UK economy and public finances will come through the global slowdown in good shape; and what particular safeguards have you taken against deterioration in public finances?
  (Mr Brown) These, Chairman, are testing and challenging times for every country. As I said in the Pre-Budget Report, no country can be insulated from what is happening around the world. We do have a recession in America, a recession in Japan and in much of Asia; the European area of the economy is barely growing at all. It is hardly surprising that the effects on world trade in particular, which has fallen in its growth from 12 per cent to 1 per cent this year, are felt in every economy around the world. Why am I cautiously optimistic about the British economy—and to a large extent this is reflected also in what the IMF have said this morning about the British economy? First of all, we start with the foundations far sounder than they were ten or 20 years ago. In other words, we have low inflation and sound public finances. Secondly, we have had a proactive approach taken, particularly by our monetary authorities. We have had seven interest rate cuts during the course of the year. That has brought our interest rates down to the lowest for nearly 40 years. We are able to do that, in my view, not simply because we have the new arrangements in place with the Bank of England, but because they are operating a symmetrical inflation target which means that deflation is as worrying to them as inflation. Thirdly, I am cautiously optimistic because there has been a degree of international cooperation that has been greater than before; and countries have looked together at what they can do in each continent to make for a stronger world economy. That is why we have published our forecast for this year which is at 2 per cent and our forecast for next year is 2-2½ per cent; and I believe that will increasingly become in line with what other people are saying about what is likely to happen.

  Chairman: To explore this issue a bit further I will hand you over to James Plaskitt.

Mr Plaskitt

  270. Chancellor, the growth forecast for 2003, looking at table A9 in the Pre-Budget Report, appears to rest very heavily on recovery of the international economy as the biggest contributor is trade—exports and imports. To what extent does that depend on you being right about your feelings about the US recovery?
  (Mr Brown) I think this is what most people are saying about what is likely to happen in 2003. If you look at the position of trade, I think it is true to say that trade was growing by about 12 per cent last year. I think the forecasts for 2003 are based on trade growing by about 6 per cent. Therefore, it is an expected recovery in the international trading position. I think most people feel that America by the second half of next year will be in a stronger position. I think it is true to say also that the forecasts coming from Europe are in the same direction. Therefore, I think it is a not unreasonable forecast of what is likely to happen in that period.

  271. When Mr O'Donnell told us at our last meeting that there was a very big increase in uncertainty relating to these forecasts, was he thinking about the international situation and the extent to which it may be unpredictable?
  (Mr Brown) I think he was thinking about what we said as a Treasury in the Pre-Budget Report, that there are risks. Obviously the American economy could have a slower bounce-back. Equally, there are risks of a structural nature; oil prices have certainly gone down; but there are risks in the oil price, as we have known from the trebling of oil prices two years ago, to the virtual 50 per cent fall in oil prices in the last year. Therefore, there are risks of a structural nature about what is happening to oil prices. Equally, there are risks in the British economy if consumer spending grows too fast. Interest rates are extremely low historically at the moment. There are risks, of course, if we do not make the productivity improvements that we want to see. All these are cyclical and structural factors which make this an uncertain and testing time, as I said at the beginning. I think that the balanced approach is the one we have given in the Pre-Budget Report.

  272. Are you still confident about that, despite the fact that since the Pre-Budget Report we have had the third quarter US figures which show a bigger contraction than we thought at the time of the PBR and a sharper rise in US unemployment since the PBR was published? Do those worry you? Do they suggest we are going to veer off the growth track you predicted, or are they within the framework you anticipate?
  (Mr Brown) It depends. What I said in the Pre-Budget Report, that the US economy was in recession for two quarters when there has been a negative growth, I do not think our projections or forecasts for the new year will be changed as a result of these two sets of figures. I think there are certain features of this downturn that are both interesting and make me more optimistic about the future. Consumer spending has held up in the United States of America. Equally, in certain production categories like cars, sales have held up; equally, house purchases have held up. So there are certain things happening in the US economy not too dissimilar from what is happening in the UK economy where consumer spending, car sales and home sales have also held up well. Therefore, I think the balanced approach is the set of forecasts we have given.

Kali Mountford

  273. I do not want to stray too far into macroeconomics, but I am concerned within these figures by some sectoral differences, and particularly in some manufacturing areas where we are seeing a decline in output. Are you confident that the changes we are seeing, and looking at the interest rate put in America today and our own inflation report, that that is actually going to be enough to maintain all the sectors?
  (Mr Brown) The key change, of course, is what has happened to interest rates where they have fallen very substantially seven times in the course of a year. It is true to say that the performance of manufacturing everywhere is disappointing. Manufacturing output has fallen by something in the order of 11 per cent in Japan, 6 per cent in America and fallen by something of the order of 3 per cent in the United Kingdom. If you look at what has actually happened within manufacturing, as you say, there are sector differences. Information technology/electronic equipment has seen a dramatic fall in output right across the industrialised world. It is something of the order of 20 per cent in some countries, and it is not far below that in Britain. If you look at some of the other industries that make up manufacturing—I mentioned cars earlier—the output of the vehicle sector is up something of the order of 7 per cent; the output of chemicals is up; the output of tobacco is up; the output of durable consumer goods is up. There is a huge effect as a result of what started in the IT sector in America and it has had an effect on Britain; but there are some sectors of manufacturing that are doing better. One of the measures we have taken in the Pre-Budget Report is building on what we have done previously and that will help productivity in these areas . Certainly what we are doing in terms of helpful investment, permanent capital allowances, regional venture capital funds, what the Regional Development Agencies can do, what we are doing in terms of technology and innovation, research and development, small business tax credit, the larger tax credit now already in place as a consultation document, what we are also trying to do in workplace skills, is improve not only the numbers of apprentices going into key sectors for the future, there has been a dramatic increase in the number of apprentices in the last few years but, equally, we are trying to get to a new position of workplace skills where there is more encouragement, particularly for small businesses, to give people the skills that are necessary for the future. In other areas, like competition policy and planning policy, we are trying to create far greater flexibility than in the past; and independent competition authority, and new attention to flexibility in planning laws for business. All these changes, I believe, are important to stimulating the greater enterprise culture in the country.

  274. To take one point further because you mentioned the Regional Development Agencies, and it is a point I have put to you in the past, I am concerned that a lot of our policies are dependent on the success or otherwise of the Regional Development Agencies, and I took your advice and I looked at my own and I have to say, Chancellor, I was somewhat disappointed in their strategy for growth in some sectors. What are you expecting to do to control the activity of Regional Development Agencies—or if not to "control" because we do not want to be too centralist—
  (Mr Brown) We certainly do not. We want to devolve that power.

  275. What are you doing to encourage them to do better?
  (Mr Brown) We have given them greater flexibility. Obviously in the first few years of their lives the Regional Development Agencies have been dealing with existing essentially urban regeneration programmes; but what they are moving towards is a far greater interest in the microeconomic and supply side factors that are influencing the regional economies. I believe their attention is increasingly on innovation in the region and what has been done to stimulate new businesses and high technology businesses, and levels of investment in the region and, of course, the provision of infrastructure. With all these things you will see the Regional Development Agencies taking a far greater interest in the years to come, and with the funds and flexibility to do so which does not exist at the moment. I regularly meet all the chairmen of the Regional Development Agencies, and we talk about how they can actually move using this greater flexibility to increase productivity in the regions. I hope you will see the effects. I think in some industries which are experiencing problems, in the textile industry as well as other manufacturing industries, they can do so much; but in terms of the long term development of the entrepreneurial economy I think they can play a very important part in years to come.

Mr Tyrie

  276. Just two quick questions on the overall presentation of the performance of the economy. We have all heard that Gus O'Donnell and everyone agrees, and you agree, Chancellor, that there is greater uncertainty than there has been for some time; but the spread of your growth predictions is still only half a per cent. Why did you keep it at half a per cent, and not widen it?
  (Mr Brown) Perhaps we should do a technical note for you on why there is a range. Under the previous government there was not this range, but was just one figure that was given. The range is because of what we anticipate are potential effects of supply side changes in the economy, productivity, growth. These are not cyclical factors, these are structural factors that will depend on what really is the trend rate of growth of the economy and, therefore, there is a level of uncertainty about that. Therefore, I saw no reason to vary the forecast in the way you suggest in having a wider range. We are dealing with the long-term factors of the economy as they impinge on annual growth rate.[1]

  (Mr O'Donnell) We made it clear in the November 1997 Pre-Budget Report and the November 1998 Pre-Budget Report that they were opportunity ranges. To quote from that PBR we say, "The ranges are not an indication of the degree of forecast uncertainty".

  277. My second question is on the output gap. I cannot remember an output gap graph going above or below the trend and not being shown to return to the trend. Indeed, that is what you did show in the FSBR at page 163—a line going above trend and then returning back to trend. In this PBR at page 150 for the first time ever I think, unless you can correct me, the output gap is shown to fall below trend and then rise above trend for one year, which I find, frankly, a little bizarre.
  (Mr Brown) I do not think it is bizarre. Anybody looking at both what we are saying about the British economy and what others are saying about the British economy accept that it had been an effect from what has been happening around the world but, equally, they believe that the monetary action we are taking is going to have the effect that that will raise growth in future years.

  278. This blip up above trend is the responsibility of the MPC?
  (Mr Brown) I am not saying it is wholly the responsibility of the MPC.

  279. It was a monetary phenomenon?
  (Mr Brown) I said the monetary action will have an effect and I do not think anybody disagrees with that.

1   Ev 62 para 1. Back

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