Examination of Witnesses (Questions 160
THURSDAY 13 JUNE 2002
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.
(Sir Edward George) And adjust. There is no question
that it makes it easier.
163. You do have an interest in having a flexible
(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
(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
(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.
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 viewI 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 issuesthat 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.
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
(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,
(Sir Edward George) As you see hereand 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 Reportwe
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
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.
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.