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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 688 -i
HOUSE OF COMMONS
TAKEN BEFORE THE
Re-appointment of Professor Stephen Nickell to the Budget Responsibility Committee
Wednesday 9 October 2013
Professor Stephen Nickell
Evidence heard in Public Questions 1 - 67
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Taken before the Treasury Committee
on Wednesday 9 October 2013
Mr Andrew Tyrie (Chair)
Mr Pat McFadden
Mr Brooks Newmark
Mr David Ruffley
Examination of Witness
Witness: Professor Stephen Nickell, member of the Budget Responsibility Committee, Office for Budget Responsibility, gave evidence.
Q1 Chair: Professor Nickell, thank you very much for coming to see us this afternoon for this re-appointment hearing.
Professor Nickell: Not at all.
Chair: I begin by asking you about an issue of current controversy, which is whether the OBR should be involved in the costing of Opposition policies. I should declare an interest: 20 years ago I wrote about this, supporting the idea. I have been supportive personally ever since, but do not let that in any way influence any replies you give.
The key issue before the OBR is whether you feel you could make a useful contribution to the debate and whether you think in practical terms you should be given that opportunity. Do you have anything you would like to say on that?
Professor Nickell: Sure. I used to be rather sceptical about how this could be made to work, but last year I had a couple of long talks with Coen Teulings, who is head of the Dutch fiscal authority, and they do it. In fact, they do more: they produce economic forecasts before elections, based on the policies of what are currently known as the nine political parties. I questioned him quite closely about how this could work and the practicalities, and he kind of persuaded me that it could work. If it could work-that is to say, if Parliament gave us permission to do it and we had the necessary resources and so on-I can see this as a very positive thing, enhancing the public debate leading up to elections. Of course, in some sense there would have to be a clear timetable and so on, but that could all be determined by Parliament. Obviously there is a danger of the OBR being drawn into political controversy, but I think that can all be managed, personally.
Q2 Chair: Do you agree with Robert Chote that allowing a Government access to the machine in order to cost their policies while not providing any access to the Opposition is unfair? I am paraphrasing, but I am not a long way from what he said.
Professor Nickell: Absolutely. I can see why that might be thought of as not fair, yes.
Q3 Chair: What about the counter-argument? You have alluded to it already, and it is very important that we just dwell on it for a moment: the perception of the OBR’s impartiality and independence is crucial to your work, and doing anything in this field, particularly in a country like Britain with such an adversarial system of politics, could be prejudicial to your credibility.
Professor Nickell: First of all, it would be good if Parliament laid down a very clear process as to how it would work, and parties had to lay out their policies in a public way so that we did not have to go trawling through manifestos or anything like that. They would have to fill in a form saying, "These are the policies we would like you to cost."
Q4 Chair: What about all the other commitments that might have been made by other spokesmen that do not appear on that list?
Professor Nickell: My feeling is that we cost policies that appear on the official list. As I say, it would be rather unsatisfactory if we had to start trawling through public statements and that kind of thing.
Q5 Chair: The Treasury already do that in order to create briefs for incoming Ministers.
Professor Nickell: Indeed they do.
Q6 Chair: So it should not be such a difficult task.
Professor Nickell: No, I am not suggesting it is a difficult task, but I would rather that each party provided an "official list" of policies they would like us to cost. Any other policies they chose not to put on this official list therefore in some sense could be thought of as second class, since they were not prepared to put these policies into the costing machine. That is not a bad way of doing it.
Q7 Chair: If they are thought of as something worth costing for a brief for incoming Ministers, but not on an official list, you can see already that we have a problem.
Professor Nickell: I am not sure. I told you it should work, and that if we got into arguments about what should be costed and, "Oh, this was not really a policy" and so on, I would be very hesitant, because the best way of proceeding is a way where everything about what the policies are is clear-cut, we produce our pronouncements on these policies, and that is that, so that there is less likelihood of us getting drawn into interactions with each party about all this, which I think would be detrimental to the OBR, aside from anything else. I am talking off the top of my head here, but that is the way I see it.
Q8 Mr McFadden: As the former Chairman of Labour’s National Policy Forum, I am sort of shocked that you would not want to read all its documents. I assure you they are very entertaining and I recommend them to you. On the practicalities of this, would the legislation establishing the OBR have to be changed at all if you were going to take on this role?
Professor Nickell: As I understand it, yes.
Q9 Mr McFadden: Do you think you would need more resources to do this? How many people do you have working for you at the moment?
Professor Nickell: Seventeen.
Q10 Mr McFadden: Do you think you would need more than that if you were going to do this for all three main political parties, maybe others?
Professor Nickell: Yes. Again, there are obviously some difficulties arising from the fact that the extra resources would be required temporarily and for a given period, and that is of course always more difficult to organise-where would these people come from, and so on?-but as soon as we could overcome that, which I am sure we can, that would be the way I foresee it working.
Q11 Mr McFadden: What you are essentially saying is that your understanding is that this would require an alteration in the legislation underpinning you, but that if the Government were willing to do that, you as an organisation would be happy to do this work, but you would need some more people in that period running up to the election.
Professor Nickell: Yes, that puts it very well. Obviously it would be helpful for us if there was some kind of cross-party agreement on this.
Q12 Chair: I fought very hard to achieve that at the beginning of this Parliament when the OBR legislation was going through, and unfortunately the Labour party in particular was against it at that time, which made it very difficult for me. The Government were not keen, but the Opposition were very unkeen indeed.
Professor Nickell: I guess that has changed now.
Chair: So at that point I had no cards to play with, and we only got as far as the exchange that you have seen in the public domain that I had at that time with Robert Chote.
Q13 John Mann: Just a quick question on timings, because there is normally a Budget, and that has been calculated.
Professor Nickell: Indeed.
John Mann: We know there is a general election at the beginning of May 2015; we are less clear exactly when an election will be formally called, but it looks like being something like four weeks before, so in reality it will be at the beginning of April. How long would it take to cost, and what are the lead-in times? I just want to lead you a little bit into the obvious follow-up, which is: when could it be done-if it was done-time-wise? You know the OBR better than we do.
Professor Nickell: Of course the Budget in March, relative to the position of the elections, is obviously an added complexity. Robert would probably shoot me if I said I thought this could be done relatively quickly, but in the way of these things, they can always be done quite fast if we have some idea, as I think we probably will, of what we are going to be doing, where we are going to be looking, and what sort of things are on people’s minds, so a certain amount of thinking will have already gone into this before we get our official list of policies. It might be possible, if we are just considering costings, to do this relatively quickly. Of course, if we wanted to go on and do forecasts consistent with the policies of each of the parties, then that would take a great deal longer.
Q14 John Mann: Your definition of "relatively quickly": is that-
Professor Nickell: How long do we have before?
Chair: A month.
Professor Nickell: A month.
Q15 John Mann: In terms of capacity-and I do not just mean numbers of people, but intellectual input as well from the key people such as you, Mr Chote and others-how many parties is that feasible for? There are three UK-wide parties; there are others that are not UK-wide.
Professor Nickell: I do not know. You can cost quite a lot of policies. Before a Budget, for example, there are many, many policies that are costed that are not seen; in other words, a lot more costing goes on, and there is quite a long list of policies in the Budget. If it is going to be for a lot of parties, then we may make a pronouncement that we can only cost the 10 most important-something like that. I am sure we can get around these practical issues, but it would be quite a good idea if we could get around them before we enter the home straight, so to speak.
Q16 Jesse Norman: Just very quickly, Professor, do you think there could be any scope for political parties asking you to cost other political parties’ policies-the ones they do not want you to see-in order to get an official valuation of them?
Professor Nickell: That is up to Parliament. You decide what you want us to do, and we will do it.
Chair: Jessie’s question goes back to the point that I was making to you earlier: a self-defining, self-limiting small group of pledges will be of very little value for public debate.
Q17 Mr Ruffley: Just following on from this, Professor Nickell, the earliest an election campaign could really begin is the second or third week of March, if you take the precedent of the 1997 general election. What would happen if the political parties kept back important announcements simply because they wanted effectively to launch them just before the general election campaign starts-in other words, doing it not this year or next year, but right up against the start of the election campaign? You said earlier that Mr Chote might shoot you for saying that a set of costings could perhaps be done quite quickly, but how would you respond to that if you were asked to cost Conservative plans and the Labour plans that only came to light in February 2015? You really would be up against a tight deadline. I give one very quick example. The "big society" announcement by the Conservatives, then the Opposition, was literally made the week the campaign started. The nature of politics means that you might be working with four weeks to spare. That presumably might need quite a lot of extra resource and extra staff to help you hit that deadline.
Professor Nickell: Do not forget that a lot of the grunt work involved in costings is done by HMRC and DWP of necessity, so in some senses it is their resources as well as ours. Of course, they are much bigger organisations, so they can maybe move people around. I do not know; I cannot really speak for them. My feeling is that there should be a timetable, and the timetable is up for negotiation to some extent. I cannot commit the OBR or anybody else. There has to be a timetable, and parties have to put in their policies within this framework-this timetable-and that is that. If they come up with something later, too bad, it cannot be costed.
Q18 Mr Ruffley: It just cannot be costed, yes.
Professor Nickell: Or will not be costed. I am not saying it could not be, but it is much better, if you have a timetable, to stick to it.
Q19 Mr Ruffley: There has to be a deadline, but this is something that does need looking at, because it is the nature of politics that political parties like springing surprises; they like the element of surprise. You are quite right: there needs to be a window beyond which you would say, "We will not be able to cost this properly."
I have a second point on this section: we have all been assuming that there might be a wad of policy papers sent to the OBR with lots of working, but suppose a policy were trotted out by the Labour party, the Conservative party or the Liberal Democrat party that said something like the pledge card of the Labour Opposition in 1997: "We will cut youth unemployment by 200,000", or "We will cut the number of young offenders by 100,000", I think it was-Pat will correct me here-in other words, a bald statement with not very much working. In a situation like that, the OBR will be asked to cost that. It seems to me that it would be incumbent on you to ask a lot of questions of the political party that made a bald statement. Presumably you would getting-
Professor Nickell: Indeed, like "How?".
Mr Ruffley: Like "How?", and I would not say that you would get involved in politics, but you might say, "This is just very bald. You say you are going to cut youth unemployment by 200,000."
Professor Nickell: I agree.
Q20 Mr Ruffley: You could get dragged into a dialogue that presumably would reach the public, and I just wonder whether or not you thought that was a real risk, and where it was incumbent on you to ask for further and better particulars because the politicians-the Conservative, Labour or even Scottish Nationalists’ manifesto drafters-had been deliberately opaque.
Professor Nickell: In the very notion of a costing, there has to be some notion that money will be spent on something.
Q21 Mr Ruffley: You have to get a statement, yes.
Professor Nickell: The statement, "Youth unemployment reduced by 200,000", is not a policy; it is just a statement.
Q22 Mr Ruffley: Exactly, and I am giving a sort of stylised example.
Professor Nickell: I hope we could devise a form that the parties had to fill in that did elicit-maybe this is pie in the sky-enough information, so that what is there could be described as a policy, rather than an aspiration or target.
Q23 Mr Ruffley: Exactly, but I am not giving you hypotheticals. It was a very effective bit of politics, the Labour pledge card. The five pledges were quite deliberately stripped-down propositions, and they were pledges.
Mr McFadden: All met.
Mr Ruffley: All met, yes, but as an example, it is not inconceivable that a political party-it does not matter who it is-would say something fairly bald and it would be incumbent on you to start asking more and more questions and to-ing and fro-ing. Even the question, "What is an aspiration?"-you might have to ask about that, spell that out. I think what you are suggesting is that there should be a pro forma.
Professor Nickell: Yes, a pro forma. If the form is not filled in correctly, we just send it back, I would say. It is very difficult for me to envisage. It is in some sense your business, not my business, or at least Parliament’s business.
Q24 Mr Ruffley: I think those answers are very helpful. Could I take you on to something different? You noted in your initial appointment hearing that should you be resubmitted for appointment again, you should be judged on whether you had, and I quote, "personally contributed to the competence, independence, transparency and openness of the OBR in the view of Robert Chote, the Treasury Committee, financial commentators, academics and the general public". What steps have you made to measure that performance by yourself?
Professor Nickell: By myself?
Mr Ruffley: Your personal contribution to the appointment.
Professor Nickell: I understand what you are saying and what you are asking me. Let me start by saying that I have not set out to try to measure my performance on the basis of these things, in part because I rather thought it was up to others, not for me to measure my performance-to get on to the specifics, Robert Chote, the Chancellor and, I would have said, the external members of the board, but there were not any when I originally wrote that. Their view on my performance I can only guess at, but it is such as to lead to their desire to reappoint me. As to the view of this Committee, you are going to make your judgment and you will presumably announce that in due course.
On my performance vis-à-vis commentators and others, I talk to various groups-people working in the financial sector, financial commentators, journalists and think-tanks and so on-and the impression that they give, it not so much about me personally, but about the organisation, is relatively positive. Of course, it is also true that we get a lot of stick from journalists, who say that we cannot forecast-"What a waste of time. Economists, always hopeless" and so on-and in that sense, because of that, I feel slightly chastened sometimes, but I think I can present a justification for why these things happen that would not be based on my simply not performing very well.
Q25 Mr Ruffley: Do you think you could do more to rebut some of these criticisms? You obviously think about it; you said you feel chastened. Do you think you could be doing more to explain why you think you are right?
Professor Nickell: We do produce a lot of output. We had a press conference this morning and we produced our forecast evaluation report, which goes into great detail as to why these things were wrong and how no one else does any better and so on. Every time Robert and I appear in public, these issues come up. But the fact is that if you are involved in forecasting, you just get kicked. That is life.
Q26 Mr Ruffley: I understand that, but I just want to pin this down. Leaving financial commentators and academics aside, let us just focus on the general public. Do you think you have done enough to explain to the general public, who, as you say, are sceptical about economists and economic forecasting? Have you done enough to make the public aware of the limitations inherent in the forecasting process? Do you think an average member of the public hears enough from you in that regard?
Professor Nickell: Me personally?
Mr Ruffley: Yes.
Professor Nickell: Maybe not. I talk to journalists. Journalists are in some sense the conduit between me and the general public. The problem is that there are economic journalists; you give an economic journalist the forecast, and of course we understand perfectly that it does not impact much on what they write the next day, so there is always a certain problem there. Maybe we could do more. I say "we" because I know Robert talks to lots of people and lots of groups of people, but from my time at the Bank of England as well, you end up always talking to certain sorts of people, by and large, but you do not get to talk to The Sun that often.
Q27 Mr Ruffley: No, I understand that. I will just conclude, Chairman, by saying that it is quite clear and quite right that the Bank of England-the Monetary Policy Committee in particular-sees that it has a mission to explain, to put it bluntly, to the man and woman in the street. I was just wondering how you think there could be more explanation of what you do at the OBR as forecasters. What more could be done to make the public aware of what is possible and what is not, so that the public have more confidence in the output from the OBR? You think more could be done; you have said more could be done.
Professor Nickell: Yes. You can always do more. Having been at the Bank, I know the Bank has a big machine that has a lot of people in the press office; half the size of the OBR would be the Bank’s press office.
Q28 Chair: But a key part of your job is to explain to the public that they should not take forecasting too seriously.
Professor Nickell: Indeed.
Q29 Chair: That is a slightly ambiguous position for a forecasting body to be in.
Professor Nickell: Yes, but I hope in our publications we make it clear that you are bound to make mistakes and if you analyse the mistakes ad nauseam-
Q30 Chair: We are agreed it is very difficult, and we are also agreed that you are collectively going to be thinking more about how to do more.
Professor Nickell: Yes, I can see that.
Q31 Mr Newmark: I have a couple of questions. First, in your written evidence, you mentioned that this Committee should consider hosting sessions where experts can challenge your thinking directly.
Professor Nickell: It was just a thought.
Q32 Mr Newmark: I am going to press on with it, then. Are there any particular experts with whom the OBR has differed historically and whom it has in mind with this suggestion?
Professor Nickell: I rather thought I would leave that to you, because you-
Mr Newmark: You must have some idea though, no?
Professor Nickell: Yes, of course we do, but we are in-
Chair: Drop us a line with a few ideas, Professor Nickell.
Professor Nickell: Okay. I was thinking along the following lines: we have a tendency to produce people who we knew were rather nice to us, whereas it might be better for the soul if there were people who historically were less nice.
Mr Newmark: It is nothing to do with nice or not nice.
Professor Nickell: By "nice", I mean-
Q33 Mr Newmark: I always like people to challenge me intellectually because I want to be challenged. I want to know if I am on the right track or not. I do not get intimidated by people doing that, and I hope the OBR has the same attitude: that they want to be challenged in their thinking.
Professor Nickell: That was rather the reason why I suggested this.
Q34 Mr Newmark: I just wondered, had you anybody in mind when you came up with that? You must have.
Professor Nickell: Why don’t I write to you with a few names?
Q35 Mr Newmark: You are being very shy. Okay, how would you rate the OBR’s forecasting performance relative to other independent forecasters?
Professor Nickell: That is a good question. First, there is one other fact-I am coming to your question-if you look in the last chapter of our forecast evaluation report, and maybe the penultimate chapter, the vast majority of our forecast areas are lower in absolute value than the average of the last 20 years of official forecasts. What about the external forecasters? First of all, an obvious point, and that is that our forecasts turn out to be reasonably close to the average of external forecasters, which means, roughly speaking, half of them do better and half of them do worse on any particular forecast. Of course, from one forecast to the next, people all started in the same place.
Q36 Mr Newmark: From what I have seen, you started off being slightly over-optimistic and then when the reality of the over-optimism was somewhat different, you almost became more conservative in your forecasting. As a result of that, things are looking a lot better than had been forecast.
Professor Nickell: Maybe the economy takes notice of our forecasting. With regard to the over-optimism, I did look at this quite carefully. We were over-optimistic for 2011 and 2012. At the time of the Budget in 2010 and the Budget in 2011, as far as I can tell, at least in those forecasts submitted at the Treasury, all the external forecasters were over-predicting GDP growth in 2011 and all were over-predicting GDP growth in 2012 by at least 1 percentage point, so, out there, there is not a forecaster who has a noticeably better record than the OBR, I think.
Coming back to this year, you are right. We were very pessimistic, and to some extent I am quite surprised by what is happening. The reason we became a bit more pessimistic was because real incomes were falling even faster in the first three months of this year than we thought. Of course that turns out partly to have been people shifting their incomes from March to April to take advantage of the higher rate of tax, but nevertheless, what is happening at the moment is very interesting, because you feel that real incomes are still falling and it is hard to imagine a sustained recovery without real incomes starting to rise, because consumption is, after all, 60% of demand, and the growing consumption is rising real incomes. Of course you can save a bit less, but that is not a sustainable stat.
Q37 Mr Newmark: We have been seeing record growth stats coming out lately on both manufacturing and the financial services sector. On top of all that, you then have the IMF effectively downgrading the rest of the world, but upgrading the UK.
Professor Nickell: It is perfectly plain that the surveys look really good. If you look at the actual numbers-look at such real data as we have, rather than the surveys-one would be slightly less optimistic, but nevertheless, it is undoubtedly true that there is going to be positive growth this year.
Q38 Mr Newmark: You mean above what was predicted, right?
Professor Nickell: There is the IMF forecast, which is going to be closer to our autumn statement forecast than to our budget forecast. Yes, that is perfectly true, but the real thing about the economy is you are not going to get real income growth until you get productivity growth, and as everybody now knows, productivity growth has been flat to falling for years and years. Productivity growth may have started to take off, and if productivity growth takes off, real wages will take off. Apart from petrol getting cheaper because oil gets cheaper-apart from that sort of thing-by and large real wages are driven by productivity, so people are not going to feel better until productivity growth takes off.
Q39 Mr Newmark: It has to do with what risks you think the US Government shutdown imposes on the UK economy. Should the US fail to raise its debt ceiling, what do you think the implications are for the UK?
Professor Nickell: Oh, gosh. The guy who runs Goldman Sachs said, "This has never happened before and this is raising the debt ceiling". Default, basically. He said, "This has never happened before, and frankly, I would rather not be around when it happens," so we do not have much to go on. My feeling about it is that the debt ceiling is the key. The problem is in some sense they do not raise the debt ceiling, but apparently the US Government has a bit of cash in its back pocket that will last for a certain amount of time, so it is not all going to happen just like that, but then there are certain times when they have to pay out $12 billion into the social security system or something, so they have to make a choice: "Do we hurt the international investors by defaulting on our bonds, or do we hurt our domestic population by not paying the pensions?"
Q40 Mr Newmark: Do you think the Bank of England should be doing some scenario planning here?
Professor Nickell: Oh, yes.
Q41 Mr Newmark: It could be quite catastrophic. Do you think there should be some serious-
Professor Nickell: It would be catastrophic if default led to the breakdown in international financial markets.
Q42 Mr Newmark: Yes, but markets go on perception as well as reality.
Professor Nickell: Oh, yes.
Mr Newmark: We saw what happened with Northern Rock.
Professor Nickell: They already are. In some sense, US Treasury bills of certain maturities are already being marked up or-
Q43 Mr Newmark: You have an inverted yield curve.
Professor Nickell: Yes, all sorts of things will happen. Of course, it will get worse as time goes on, and I am sure that the Treasury, the Bank of England, the US Treasury and everybody else is working out what they are going to do. I do not know, but my guess is that they will probably go for their own population, but who knows?
Q44 Mr Newmark: So there are implications for the UK economy, then?
Professor Nickell: It is an important point.
Chair: It is a very important point.
Mr Newmark: I think we should have another session.
Professor Nickell: But luckily for us, we will know what is happening when we give our forecast.
Chair: It is something that is probably best covered in another session.
Q45 Stewart Hosie: You spoke about the forecast evaluation report that did tell us that the real GDP forecast areas were greatest for private investment, net trade, then private consumption. Can I turn to some of the component bits of that?
Professor Nickell: Yes, of course.
Stewart Hosie: Net trade first. Sterling has depreciated by almost a quarter, 23%. For the last four or four and a half years, it has been down. In our trade balance in goods, we have debts of £109 billion, a deficit in goods and services of £35 million and a deficit balance of around £60 billion. These are quite extraordinary figures. Where do you think the OBR and other forecasters should now be looking, in terms of the impact of sterling being depreciated? Should the forecasters continue to say, as they have for some years, that exports will eventually pick up on the back of sterling being depreciated, or should we be saying, notwithstanding the 25% depreciation in sterling, "This is the new normal, a deficit in trading goods of around £26 billion a quarter"? What should we be saying? That is four years now. There has been no improvement.
Professor Nickell: You will find that in our recent forecast we do not hold out hope for net trade making much of a contribution going out. I think we understand a lot more than we did. Basically what has happened is that manufacturing has responded to the fall in sterling in exactly the way one would expect. It is service sector exports that have not held up at all, and one can basically hone in there and say that the financial sector of service sector exports, which were quite important, has basically collapsed. The reason that has happened is due to the way that service sector exports work. You have a bank like Royal Bank of Scotland that has an absolutely enormous balance sheet abroad, and associated with that enormous balance sheet are services provided to the people whose assets or liabilities you hold, and those make up financial sector exports, those services that these banks provide. Come the crash, the banks of course contracted their balance sheets within the UK, but they contracted their overseas balance sheets much more than they contracted their home balance sheets, and that contraction of overseas balance sheets knocked financial services exports for six.
Q46 Stewart Hosie: Professor Nickell, I do not dispute that in general terms. The problem is that the overall balance for goods and services, which includes that, is coming down-minus £8 billion, minus £6 million, and minus £5 billion over the last three quarters. It is the deficit in goods that concerns me. It is a stubborn deficit of £25 billion or £26 billion every single quarter, almost unchanged, year after year. We seem to be getting no benefit whatsoever in terms of the big numbers from the depreciation in sterling. I think the question I am asking is: when are we going to stop forecasting growth and accept that something else is going to have to happen before we see any improvement in the contribution to GDP growth from net trade?
Professor Nickell: As I said before, we have already given up, in the sense that in our recent forecast our forecast contributions from net trade are absolutely tiny. We are not banking on net trade any more, and I do not think we have done for quite some time. I have tried to explain what has happened, and we do not think there is more to come. There was quite a burst initially, but in our forecasts we do not think there is any more to come on this.
Q47 Stewart Hosie: That is helpful. Let me turn to investment and consumption. We have seen the net borrowing figures for individuals, but they have bounced along the bottom now also for four or five years. There is somewhere between zero and £2 billion a month net borrowing, compared to £12 billion a month at peak before the crash.
Professor Nickell: Is that unsecured?
Stewart Hosie: I think that is the combination, if my memory serves. That is total net lending. The unsecured figure is given separately.
Professor Nickell: That includes mortgage?
Stewart Hosie: Yes, that includes it.
Professor Nickell: Go on, sorry.
Stewart Hosie: So we bounced along somewhere between zero and £2 billion a month for about four and a half years, compared to £12 billion at peak before the crash. What increases in net borrowing do you think should now be factored into GDP forecasting in the next six or 12 months? Should it be a higher figure than zero to £2 billion? Where do you think net borrowing should sit now when we are looking at growth forecasts?
Professor Nickell: I find it hard to give you an actual exact number, but the fact is that secured borrowing in a net sense depends on new mortgages. Basically, people are paying back existing mortgages; with new mortgages, the new loans offset that, so the more new mortages there are, in your number you will see increases in net lending to households. I can safely say that what with one thing and another, it is quite likely that the rate of increase in new mortgages is going to start going up. In fact, the rate of lending on new mortgages is already going up and that will continue, and you will find as part of this process that net lending to households will go up and the debt-to-income ratio of households will start to go up. That is broadly the inevitable consequence of a housing market which is more buoyant, which will include more mortgages.
Q48 Stewart Hosie: A final question: much of this may be driven by Government schemes. If the FPC decides to pull the plug on mortgage assistance-type schemes, then that could change. I suppose the question I have is this: would it not be more prudent, in terms of forecasting, to look at net borrowing over the last years and say, "It is going to continue to bounce along the bottom" in the same way that you have effectively now discounted any additional growth through exports, rather than give an indication that net borrowing will increase on the back of mortgages when that is not at all certain?
Professor Nickell: That is going to be a forecast judgment. All I can say is that I do not know what judgment we will come to in the end, but if you want my personal opinion, I suspect that mortgage borrowing will go up for one reason or another, and as you rightly point out, obviously if it starts going "too fast" in the opinion of the FPC or something, they will stop it.
Q49 Jesse Norman: Professor Nickell, to go back to something you were talking about earlier, when you have done costings of individual policies, or seen them done at the Treasury, is there an exercise where people then go back and see whether the costings were accurate, based on what happened?
Professor Nickell: I do not think a great deal of that goes on. The difficulty is, of course, you get total figures. You can say, "If you do x, y, and z to tax rates-if you make this change to tax rates-it costs this amount. If you do that change to tax rates, it costs that amount", but at the end of the day what you see is just the total tax take, so it is very difficult to put the outcome numbers precisely against each policy. I think it has to be admitted that not a great deal of this goes on.
Q50 Jesse Norman: It does not happen, and it would not be a good idea to have it, because you cannot dig enough to assess-
Professor Nickell: If you are thinking of a change in the benefit system, and as part of the costing, it says, "This would lead to x more people", you might be able to pinpoint that, and of course the DWP does analyse and evaluate policies like the back-to-work policies and that kind of thing; it does evaluations that are fairly precise, but overall it is pretty much impossible to evaluate each costing ex post, and to isolate the impact of that policy change.
Q51 Jesse Norman: Thanks. Turning to the issue of forward guidance, did you see the session that we had with the Governor of the Bank of England on forward guidance?
Professor Nickell: I am afraid I did not watch it.
Jesse Norman: Or read any of the-
Professor Nickell: I did first read about what was said.
Q52 Jesse Norman: Do you think forward guidance has made monetary policy clearer?
Professor Nickell: I do not know. My feeling about this is that it is probably not a good idea for members of the Budget Responsibility Committee to comment on the conduct of monetary policy. I think it really, seriously, is not good for me to start commenting on monetary policy process. One thing I can say about forward guidance, however, is that we will automatically take account of it, because of course in our forecasting procedure, we take the market view of what is going to happen to interest rates, and insofar as that is affected by forward guidance, it is automatically taken account of. Of course, I suspect it will mean that there are more people looking at our unemployment forecasts than maybe there were before, because unemployment forecasts are now part of the forward guidance nexus.
Q53 Jesse Norman: In the forward guidance that we have seen so far, do you regard that as a tightening or a loosening of monetary policy?
Professor Nickell: I cannot say I have thought about it.
Chair: Your face does tell us something.
Professor Nickell: The way I think about it is you look at the impact. There was forward guidance; then you can look at the time path of the market’s view of what is happening to interest rates. The market’s view changes all the time. Pinning some change on the market’s view as to what is going to happen to interest rates, to the announcement of forward guidance rather than any other things going on in the economy, is pretty much impossible, so I do not know whether it is tightening or loosening.
Q54 Jesse Norman: Without commenting on its wisdom as a policy, it has the technical deficiency that it has unknown effects, because it gets lost in the chop of the way in which interest rates are changing.
Professor Nickell: It is difficult to ascertain ex post the impact it has had on the market view of what is going to happen to interest rates, which is not to say that very clever economists cannot think up calibrated measures of what should have happened, and what its consequences should have been. But to confirm whether that has happened is by no means straightforward.
Q55 Jesse Norman: That is certainly true, and of course the Governor himself seemed to be in some doubt as to whether it was a tightening or a loosening, which is unusual and surprising. Just to be clear, it cannot be the mark of a good policy if its effects cannot be publicly evaluated, can it?
Professor Nickell: That is a very deep question. No, I do not agree with that, because I think you can have a policy that is pretty sound, but it would be very difficult to detect from ex post what has happened-the precise consequences of that policy. It is the counter-factual problem: "What would the world have been like had this policy not been enacted?" It is a very difficult question to answer, and can only really be answered in cases where by some quirk of what happens in the world, you can isolate the effects of a particular announcement.
Q56 Jesse Norman: You are comfortable that this is a policy that could be implemented in the near certain expectation that there is no evidence either way that would show whether it was a good or a bad idea?
Professor Nickell: If you keep on doing it-if you do it again-you may gather some more information, and then if it is repeated enough times, a clever empirical economist may be able to make estimates of its consequences from the observed data.
Q57 Teresa Pearce: You have previously expressed the view that the Help to Buy scheme could lead to increased prices but not increased supply. Is that view shared by your colleagues on the OBR?
Professor Nickell: Prior to your Chairman’s question at the end of the last time I was here, I pretty much said that. I do not think my colleagues on the Budget Responsibility Committee would be leaping up and down to disagree with me.
Q58 Teresa Pearce: But it has not been discussed? You have not discussed it?
Professor Nickell: Of course, not only is it being discussed, but it is being thought about in a relatively deep way, and when we publish our autumn statement report, we will have an analysis that is as transparent as possible. I will not say you pin down the precise consequences of this, but it will certainly be part of our analysis and so we are actively discussing this question.
Q59 Teresa Pearce: But currently your estimates of increased house prices are fairly conservative and small, and also you have conservatively predicted the number of transactions a month for next year, where the banks that have come forward with this scheme now are staying open extra hours to cope with the demand, they have said. Will you have to do more modelling to reflect what has been happening?
Professor Nickell: No, exactly so, and there will be a lot of information, but I assume that someone will be able to count the number of mortgages that are issued under this scheme. That does not necessarily tell us the consequences of the scheme, because there is a question of whether they are additional-that is, had there not been the scheme. Maybe they would have been replaced by other mortgages, if you see what I mean.
Teresa Pearce: I do.
Professor Nickell: Obviously, banks might have an incentive to use this scheme, whereas nevertheless they would have offered mortgages otherwise.
Q60 Teresa Pearce: In earlier evidence you have spoken about how hard it is to estimate and to forecast-some people get it right, some people get it wrong and it is very, very difficult. How much more difficult is it when there is a fear of a housing bubble and yet now the FPC will be able to just pull the plug on this scheme? Will you have to do two types of estimates, one for if the scheme runs for its full three years and one if it does not?
Professor Nickell: I do not know, because I am not on the FPC, but my feeling is that there is quite a long way to go in the housing market before the FPC decides that they want to introduce some sort of restrictions. They could introduce loan to value restrictions or whatever. They have, as I understand it, quite a lot of power. At least they could tell the Prudential Regulation Authority to introduce restrictions, but my guess is that is quite a long way off. Obviously we have to make a judgment, and we will make a judgment about what is going to happen to the housing market, including if the Financial Policy Committee steps in.
Q61 Teresa Pearce: A moment ago you talked about it being hard to judge, because are they new mortgages, or just replacement mortgages, or are they-
Professor Nickell: No, would there be other sorts of mortgages.
Q62 Teresa Pearce: Exactly, so are they purchases that would not have happened otherwise.
Professor Nickell: Exactly.
Q63 Teresa Pearce: So how will you estimate the increase in stamp duty, for instance?
Professor Nickell: We do not care much. Stamp duty is based on transactions, so all we are interested in is transactions.
Teresa Pearce: But to estimate-
Professor Nickell: We will obviously try to measure the impact of Help to Buy on transactions, but by and large we have a method of thinking about transactions in the context of mortgage debt, so we look at all these things together to try to get a consistent picture of where we think things are going. Help to Buy is a part of that, but there is a lot more to it than Help to Buy.
Q64 Teresa Pearce: But if with Help to Buy people move who would not have moved otherwise-maybe downsize, upsize, whatever-
Professor Nickell: There will be churning, yes.
Teresa Pearce: There will be more churning; there will be more stamp duty.
Professor Nickell: Yes, indeed there will, and stamp duty has already started moving upwards partly because of that sort of London effect. There have been quite a lot of transactions in London, because you get so much more stamp duty from very expensive houses than cheaper ones. I should say it is a slightly more complicated issue, because the way you think about Help to Buy is that you have a fixed stock of houses and every year there are 300,000 or so last-time sellers-that is, people who either die or move into a care home or something-and that releases these houses into the market. Then there is a lot of churning-people moving up and so on-and at the other end, there are the first-time buyers who are potential owner-occupiers and the buy-to-let investors. These are the people competing for the houses that are released on to the market, and Help to Buy tilts the balance somewhat more in favour of the first-time buyer owner-occupier group, as opposed to the buy-to-let investors. So what I think you will see is that there will be more of the first-time buyer owner-occupiers moving into the housing market and buy-to-let investors will have less of an impact.
Q65 Teresa Pearce: So what you are saying is if there are more people able to buy, but the housing stock does not increase, then surely-
Professor Nickell: Exactly, someone has to not go.
Teresa Pearce: That will cause a housing bubble, because if you have a house to sell and there are lots of people who want to buy it, you can ask whatever price you want.
Professor Nickell: No, it is not a bubble. The price has to rise to ration the stock of houses across the people who want to buy. It is genuine demand. The buy-to-let investors are buying because the rental yields on properties are not bad at all and the first-time buyers are buying because they want to own a house rather than rent. It is a real demand. It is not just based on a portfolio notion of houses. With the London top-end, there is obviously some of that.
Q66 Teresa Pearce: Just lastly, in March, Robert Chote said to us that there was not enough information to evaluate the Help to Buy scheme, to include it in forecasts at that point. Do you have enough information from the Treasury now?
Professor Nickell: It is not just the Treasury; it is the information about who is in, who is out, how many mortgage lenders are going to take advantage and so on.
Q67 Teresa Pearce: Do you have enough information from everybody, then?
Professor Nickell: Yes. I think we can do something of a job in the next round of this.
Chair: Thank you very much for giving evidence this afternoon. We are extremely grateful.