Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 160 - 179)

THURSDAY 13 JUNE 2002

RT HON SIR EDWARD GEORGE, MS KATE BARKER, MR DAVID CLEMENTI, MR MERVYN KING AND MR STEPHEN NICKELL

Mr Tyrie

  160. Following that up very briefly. All things being equal, does having a flexible supply side in the economy, flexible labour markets, make your job easier?
  (Sir Edward George) Yes.

  161. Or more difficult?
  (Sir Edward George) No. Flexibility on the supply side, undoubtedly what that does basically is to increase the capacity of the economy to grow.

  162. Adjust.
  (Sir Edward George) And adjust. There is no question that it makes it easier.

  163. You do have an interest in having a flexible supply side?
  (Sir Edward George) Absolutely.

  164. I know that I have asked this in a slightly different way to you before but does that not point to the Bank taking a view on whether they think the supply side is sufficiently flexible and where it is not saying so, not in the sense of trying to criticise Government measures, as you interpreted my question last time I asked you, but in a very broad and long term sense?
  (Sir Edward George) Of course we do have an ongoing interest in what is happening to the supply side. The debate we have been having over several years about the impact of new technology on the supply side is terribly important to us because we influence demand and it is demand in relation to underlying supply that is the main driver of inflation.

  165. Do you think it would be unreasonable to expect us to see in the Inflation Report some assessment of the supply side and improvements that can and should be made to it?
  (Sir Edward George) What the Inflation Report is trying to do is to explain the context for monetary policy.

  166. Okay. In the Annual Report or one of your publications?
  (Sir Edward George) I do not think we are particularly well placed to do that. The Annual Report is explaining the role of the Bank and what the Bank is doing and all of that.

  167. You have plenty of vehicles to publish it, I was trying out suggestions. I am suggesting the Bank make an assessment of the supply side of the economy periodically and say what it thinks.
  (Sir Edward George) I may be wrong but I think we have published the occasional paper on the developments on the supply side.
  (Mr King) The Inflation Report each time it comes out contains implicitly in it an assessment of the supply side because if we felt there had been a significant change to it that would have affected our judgment about the pressure of demand on inflation. The phrase you used a bit earlier was "the changes which can or should be made". I think that goes way beyond our remit, actually, because that is talking about changes in the supply side that it might be a good idea to introduce and that is not the task of the Bank.

  168. The phrase you used was it is implicit in the Inflation Report and I am suggesting something that is more explicit. In doing so I am only urging you in the direction of several other of the world's leading central bankers. Alan Greenspan has been very frank about his view of the supply side of the American economy on occasion in contrast with his predecessor, Volcker. I am suggesting that you might want to tread that path.
  (Sir Edward George) We will look at that. I think you will find if you go through the Inflation Report that we have discussed supply side issues from time to time. That is not our area of expertise but obviously we do look into it.

  169. Do you think you need more expertise in it? You have agreed at the beginning, and I strongly agreed with that judgment, that it makes your job much easier if you are running an economy with a flexible supply side.
  (Sir Edward George) Yes but, you know, I think I have said very often in the past that it is encouraging to think that these changes might be happening. I am talking now about technology change rather than policy changes. It is very encouraging to think they may be happening but we cannot back the ranch on it until we actually can see it in the data. That is certainly part of our remit. I will have a look and see.

  Mr Tyrie: You have said you will look at it and that is good enough for me.

Mr Cousins

  170. I wonder if I can ask Mr Nickell as a labour market economist the way he thinks things are going? There is an issue which is referred to in paragraph 15 of the May Minutes where the point is put that if the effect of increased public spending in the Budget largely goes on increasing public sector pay then the overall effect of demand on the economy will be limited if that increased public spending. Is it your view—I am asking you this view now not so much as a member of the Monetary Policy Committee but as somebody who tracks the labour market economy issues—that in fact the increase in public spending is likely to go largely on increases in public sector pay?
  (Mr Nickell) I think it is likely to go largely on increases in public sector pay but obviously there are areas in the public sector where the labour market is very tight, such as nursing. It would not surprise me if as a consequence of further increases in the demand for nurses this is not one way or another reflected in nurses' pay being somewhat higher than it would be otherwise. I do not expect this effect to be that big. Of course a lot depends on the extent to which various schemes can be introduced which actually increases the supply of those people wanted by the public sector who are in rather short supply currently.

  171. You do not see, for example, the possibility of a return to some form of incomes policy within the public sector, whether openly or overtly stated or not?
  (Mr Nickell) No, I do not think so at all. To some extent it is not just a public sector issue. Looking at nursing again, a lot of nurses are supplied by agencies so this is a private sector thing and you would expect to see the price of agency nurses to be one of the things which moves quite rapidly in response to excess demand.

  172. The implication of that is that the increase in public sector spending you would anticipate will not be contained with any increases in public sector pay and therefore will contribute to an overall expansion of demand in the economy?
  (Mr Nickell) To some extent, yes.

Chairman

  173. Okay. In terms of the labour market could I refer you to page 44, the top of the page, when you said "In previous Reports, the central projection was based on the assumption that supply potential would grow in line with the average growth rate of GDP over the past 40 years of some two and half per cent. However, evidence from the Government Actuary's Department suggests that the working population has grown rather more quickly in recent years than previously estimated, due to an increase in inward migration."
  (Mr Nickell) Right.

  174. "The Committee has raised slightly the assumption. . .". Given the Government Actuary's Department forecast 60 per cent growth in the working population between 2002 and 2006 and then revised upwards its estimate of net immigration from 1998 of 85,000 up to 120,000 and given the Treasury has considered that an under-estimate and is basing its projections on 146,000 net immigration per annum, what forward assumptions have you made regarding the net migration and its effect on the economy? Do you see that having a sectoral impact say, for example, in manufacturing and areas where skills are required?
  (Mr Nickell) The assumption we made I think was based on the Government Actuary's Department. They produce a number of different scenarios and I believe I am right in saying that the Treasury took the higher scenario and we took the middle one.

  175. They took 146,000.
  (Mr Nickell) That is why our number is in fact a little bit lower than the Treasury's number of this trend in growth looking forward. That is basically the story there. As far as the role of immigration is concerned, overall I think it is clear to say that in terms of the supply side of the economy, immigration is a contribution to potential supply and in the words which have previously been used, to some extent that makes our job easier because potential supply grows faster. In so far as immigration can be focused on particular skills that are required that is a wholly good thing. Of course the issue of immigration is a wider issue because there are social issues, there are issues of housing and so on, there are moral issues about the extent to which we wish to attract skilled professionals from third world countries which are issues I guess which go rather beyond our brief but nonetheless are thought of.

  176. Given you have mentioned that in the Report, do you see net migration as an important issue in achieving the growth targets over the next few years? I was at a conference in Washington last week for Budget heads of OECD countries and the conference was very clear that they see that as important for their economy. Does that mean something has to be factored into the economic spectrum in the years ahead?
  (Mr Nickell) No question. I think it is clear that the whole issue of immigration is going to become more and more important and one of its aspects is the fact that successful economies around the world are very attractive places. One way or another, they will draw in employees, something that has been going on in the United States in a rather bigger way for a long time. I think that is going to be something which will become increasingly important in the future, yes.

  177. Given you certainly will not get into the social, moral and political field, and rightly so, on that, will you be taking this into consideration in your forward assumptions, Governor?
  (Sir Edward George) As you see here—and I am very glad that Mr Tyrie has come back because this is an area on the supply side that we do comment on in the Report—we would not be seeking to reach alternative views from the Government Actuary's Department on what is likely to happen, what is happening to the trend. We will take his assumptions, as we did for this forecast.

  178. I take it from the answers that net migration will be an important issue in the economy in years to come?
  (Mr Nickell) Yes.
  (Mr King) It may even be important in trying to understand what has happened in the last few years because we may not have completely accurate information yet on what has been the case in the last two to three years. At staff level, we have meetings with the Government Actuary's Department and other departments to try to understand more about what is going on. You are right, this an important issue because it can affect the numbers.

Mr Beard

  179. This Budget and several Budgets recently have brought measures in to improve the economy's productivity. Does the Bank give an assessment of how much impact this is going to have on productivity growth? Do you take those sort of things into account in the forward projections? What are the assumptions you are making on productivity growth as you look forward?
  (Sir Edward George) Not in a forward looking way. Clearly the people who are doing the forecasts at a detailed level would be conscious of major changes which could have a major impact. In an incremental sense I think essentially we do it by looking at the trend, looking at the recent actual evolution of productivity growth rather than making a stab at guessing what might happen to productivity. Clearly, going back again to the new technology debate, we followed that very closely. Again essentially we built into our forecast going forward the possibility that this might happen but not making strong assumptions that it would because that would have been very much a gamble really.


 
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