Welcome to the second meeting in 2016 of the Scottish Parliament’s Finance Committee. I remind everyone present to turn off any mobile phones or other electronic devices.
As members will be aware, Richard Baker resigned as an MSP on Monday. I take this opportunity to thank him for his contribution to the Finance Committee, and to wish him every success in the future. We are therefore down to six committee members, at least for today.
Our first item of business is to take evidence on the recent United Kingdom spending review from Paul Johnson, director of the Institute for Fiscal Studies. I welcome Mr Johnson to the meeting and invite him to make an opening statement.
Thank you very much. I have just a couple of points to make in my opening statement. As will have been clear following the spending review, the scale of the cuts that are being imposed is somewhat less—significantly less, actually—than was implied by the Conservative Party’s manifesto last May and a bit less than looked likely following the budget last July. That meant that the scale of the cuts that are being imposed on the so-called unprotected departments is somewhat less than we expected beforehand, but it is nevertheless significant. The average cuts to unprotected departments over the next five years are still in the order of 17 or 18 per cent, although the pre-spending review figures suggested that the figure might be as much as a quarter, or even a little bit more.
One of the questions is, why that change, first, since the manifesto and, secondly, since the July budget? Since the manifesto there has simply been policy change. There have been decisions to delay some of the cuts and to increase taxes by around £15 billion, if you put the July budget and the autumn statement together. Secondly—and it is very much a secondary point—there were some forecasting changes from the Office for Budget Responsibility, which gave the Chancellor of the Exchequer some additional room for manoeuvre.
The third point that I would make is that some relatively small changes have made quite a big change to the scale of the implied cuts for the unprotected departments because there is a big gearing effect, in the sense that the unprotected departments are becoming a smaller and smaller fraction of the total, so relatively small amounts of money can make quite big percentage differences. However, I stress that the scale of the cuts, both over the next four years and over the period since 2010, is still substantial.
All of that has been bookended by the fiscal charter. There is a clear rule that the chancellor wants to work to, which is to get into surplus by 2019-20, and he has continued to aim at a surplus of around £10 billion by that date. As I said, it was, in part, some of the small forecasting changes that allowed him a little bit more flexibility than he might have expected. One of the big open questions about the next two or three years is how he will respond if forecasting changes move in the wrong direction, because the fiscal target that he is following through this session of the UK Parliament is very different from the fiscal target that he was following through the previous session. In the previous session, if forecasts changed and if the economy was doing a little bit less well than expected, he could push out his point of reaching budget balance. His current rule does not allow that and, as the Office for Budget Responsibility has said, there is about a 45 per cent chance that he will not meet that fiscal target because of the way that forecasts tend to change.
The big unanswered question following the spending review is about what happens if forecasts change even quite modestly over a three or four-year period. A sum of £10 billion three years out is a tiny number. I know that £10 billion is a lot of money, but it is small change out of £700 billion or £800 billion of spending and taxes and changes much bigger than that will happen in one direction or another. That leaves quite a bit of uncertainty around how he will respond, either on the tax side or on the spending side.
A significant part of the spending review announcements was about partially undoing the welfare changes that were announced in the July budget. The crucial thing to note in that regard is that the announcement undid the changes to tax credits that were announced for this April onwards but made no change at all to the long-run structure of universal credit, which was also cut back in the July budget.
That has two effects. It will protect everyone in cash terms: there will be no losers this April and, in the long run, anyone who is currently on tax credits will be protected. However, all those people who move on to universal credit afresh or who move off tax credits and then after a period move on to universal credit will get less than they otherwise would have done.
The chancellor has therefore managed to save as much money as he hoped to save in the long run, without hitting people in cash terms in the short run, which might tell us something about how he might treat his fiscal charter. The concomitant of that is that, in essence, he has abandoned the welfare cap that he put in place just a year ago. The cap will be broken in each of the next three or four years and then will be met only by a whisker—even that will be with some interesting accountancy—by the end of the parliamentary session.
Of course, a whole set of other things were going on, but those are the big headlines, as it were, from what we found after the spending review.
Thank you for that account, which is greatly appreciated.
We have copies of your comments of 26 November on your post-autumn statement briefing. We also have copies of the preceding IFS briefing, “The Outlook for the 2015 Spending Review”. We will be asking about those as well.
In your outlook paper, I was interested in the section entitled “The total departmental spending envelope”, in which you talked about departmental expenditure limits and annually managed expenditure. You said:
“AME will grow by 4.1% in real terms between 2015-16 and 2019-20. This means that DEL will need to be cut by 3.2% over this period to keep to the government’s total spending plans”.
I am not too concerned about the percentages, because things have changed a wee bit since the review announcement. However, the general trend is towards AME rather than DEL. What does that mean for the stability of the public finances?
There are a couple of big things going on in the AME numbers. One is that, over time, we are seeing a significant reduction in the fraction of national income that is devoted to working-age welfare. I cannot remember the exact timing, but I think that by the end of this parliamentary session the proportion will be at its lowest level for something like 30 years. In terms of the AME numbers, the fraction of national income that goes to working-age welfare is set to fall quite significantly, certainly between 2010 and 2020.
Two other things are driving up AME. One, of course, is pension-age welfare. The number of people over pension age will increase by 2 million over this decade, so we really are in a position in which demographic change is having a significant effect. That is the case right across the public finances. If we look at spending on social care and health and spending per capita across a range of things, we find that demographic change is having a big effect—it is clearly having a big effect on the AME numbers. In addition, the average pension entitlement among people who are hitting pension age is continuing to increase, relative to the oldest pensioners.
Secondly, although interest rates are very low, debt is continuing to grow. Therefore, the bit of AME that is debt interest spending is growing as debt grows, although it is not at a historically high level.
You asked about the impact on the stability of the public finances. I would say two things in response. We are more dependent than we otherwise would be, because of the stock of debt, on what happens to interest rates and inflation. The amount that we have to pay for the part of the debt that is index linked—it is some £200 billion or £300 billion—depends on the rate of inflation. If the rate goes up, we clearly end up spending more.
As it happens, over the last two or three fiscal events, inflation expectations have gone down, which has given the chancellor a windfall. That will not be true every time; it will happen in the opposite direction at some point, which will potentially create challenges.
The basic interest rate matters a bit less, because the stock of debt is not affected by the rate that has to be paid on new debt. Over time, the debt nevertheless rolls over so interest rate increases will have an effect on the public finances. There has been a positive shock over the last few fiscal events, but at some point it will become a negative one.
In the longer term, the increased spending that is driven by an ageing population is not something that will create uncertainty in the public finances, because we can foresee it with a considerable amount of certainty; rather, it is something that will create less space for other spending.
In your remarks on the post-autumn statement on 26 November, you said, referring to the chancellor, that
“He’s going to need his luck to hold out. He has set himself a completely inflexible fiscal target—to have a surplus in 2019-20.”
You also touched on that in your opening remarks this morning. Last week, the chancellor said that we face
“a dangerous cocktail of new threats from around the world”.
There seems to be an indication, even since the autumn statement in November, that we are heading in the wrong direction. RBS yesterday predicted a 20 per cent market fall and urged people to sell, sell, sell, which I thought—
It could be a self-reinforcing policy.
Yes—one wonders why people would do that.
You said that if the chancellor were unlucky—that is almost a 50:50 shot—the OBR’s prediction is that there is a 55 per cent likelihood that he will reach his target. How likely do you think that is, given what has been said in the last week or so about changes in interest rates across the Atlantic?
A lot of the recent news has been new and bad, relative to what we knew less than two months ago, when we had the autumn statement. My inclination is not to build too much on what is still a short period of additional news, although it is all bad. The stock market here has gone down, there are problems in China and the most recent public finance numbers from the OBR are less positive than the ones that it knew about when it made its forecasts for the autumn statement. There is a set of things that are looking less positive than they did two months ago.
I do not know how big a difference that will make to the OBR’s forecasts in March. It will be difficult to decide whether the recent news is sufficient to make a significant change to its longer-term growth forecasts. If there is such a change—and the change would not have to be very great—the fiscal rule will be much harder to meet. I do not have the numbers in front of me, but growth forecasts would not have to change by more than a few tenths of a percentage point each year for that to mean that, on the current set of policies, we would not meet the target of a £10 billion surplus.
That leaves a very difficult set of choices for the chancellor. Under those circumstances, does he decide that he needs to cut spending on the police, local government or social services, which he managed to protect in the spending review? Does he need to find some additional taxes from somewhere else? Does he do something much looser on his fiscal charter than he is currently intending to do? Does he just wait for something to turn up? One entirely plausible response would be to say—
He could say, “Don’t panic. Steady as she goes, and we’ll see what happens eventually.”
Exactly. He could say, “Public finance forecasts have changed in the past three months, and it would be silly for me to make a big change in policy given that we are seeing the forecasts move around a lot. I am not going to change policy at the moment, but if the forecasts are still looking bad in a year’s time, I will change policy at that point.” He might decide to do that.
09:45
In your outlook, you predicted that, in England, there would be a cut of 64.3 per cent in local government grants over the decade. What is that figure likely to be now?
I cannot remember what the 64 per cent covered. Essentially, the central Government grant to local government, excluding the bit that is made up of business rates revenue, will fall to close to zero by the end of the current session of Parliament. That is a remarkable change.
Of course, that does not imply a reduction of anything like 64 per cent in the spending capacity of local authorities. It is part of a genuinely revolutionary change—I think—in the way in which local government in England is financed. The position in 2010 was that local government financed approximately a quarter or a third of its spend—I cannot remember exactly—from council tax and all the rest of the money came directly from central Government. A large chunk of that money was revenue from business rates that was taken into central Government and then distributed to local government; it just looked like 25 or 30 per cent came from council tax and the rest came in a grant.
Essentially, by 2020, we will have moved to a position in which 100 per cent of local government spend will be self-financed, with approximately one third from the council tax and two thirds from business rates. The difference is that all the business rates revenue will now go automatically to local authorities, not in the sense that each one will keep all of its own business rates revenue, but in two other senses. First, that revenue will be kept specifically within local government, and, secondly, any change in business rates revenue in any local authority that results from additional business and so on will be kept within that local authority.
The level of business rates revenue that is expected by then suggests that central Government will in fact give local government additional responsibilities, because the scale of the cuts, from central Government’s point of view, will not be big enough to create additional real cuts, as it were, for local government. Local authorities will expect to be given additional responsibilities. We did not hear in the spending review—as I had thought that we might—about what those additional responsibilities will be, so we will find out more about that.
Finally, a week or two after the spending review we heard some more details about how the central Government grant to local authorities will be distributed. The way in which that has been happening has changed somewhat. Between 2010 and 2015, broadly speaking, the grant to each local authority fell proportionately in much the same way, so those local authorities that were more dependent on grant suffered more in total. That changed somewhat in the December numbers, and we now have something closer to a similar, proportionate reduction in overall spending power rather than cuts of the same proportion in the central Government grant. That brings us closer to where we were pre-2010.
The period between 2010 and 2015 was significantly harder for those local authorities that were more dependent on the central Government grant—in other words, authorities that are broadly poorer or those in London—whereas the change in 2015 meant that there was more of a spread of spending power across local authorities.
I asked about that specifically because the committee has heard in evidence that a similar model should be adopted in Scotland.
You mentioned in your statement of 26 November the £3 billion tax on the payrolls of companies with pay bills of more than £3 million. What impact will that have on those companies? Has there been any analysis of that? The OBR seemed to suggest that it might impact on the wages of employees.
In the long run, that is the most likely effect. It is effectively a payroll tax, and it will therefore increase the costs to businesses of employing their staff. In the long run, one would generally expect that to result in a reduction in wages, just as we think that employer national insurance contributions are probably largely incident on the wages of their employees.
The apprenticeship levy clearly has a second significant effect, which is that, because it can be offset against anything that is spent on apprenticeship training up to the point at which the apprenticeship levy runs out, the cost of apprenticeship training to the company is effectively zero. Instead of paying £100 to the Government, the company pays £100 for the apprenticeship. That could have two effects: it could result in a real increase in genuine new apprenticeship training, or it could result in some rebadging and relabelling of activities in a way that qualifies for the money but does not change behaviour enormously in a real sense. We will have to wait and see which of those effects will predominate. It will be nice to get a serious evaluation of that.
I move on to welfare, which again you touched on in your opening statement. In relation to disability benefit reforms, your briefing note states:
“Year after year expected savings from this reform go down.”
Why is that?
In the initial analysis, particularly of the movement from disability living allowance to the personal independence payment, the Department for Work and Pensions expected PIP to be rolled out much more quickly than it actually has been and, secondly, it expected much bigger savings from the roll-out on the basis of the new medical tests. Neither of those predictions has proved to be robust; indeed, each time a new prediction has been made, it has proved to be equally as unrobust as the previous one. The DWP is finding, first, that it is much more difficult from an administrative point of view to do what it wants to and, secondly, that actually most people who were benefiting from the disability living allowance were, as it might say, genuinely facing the kinds of disability that they said they were.
Why did the DWP get that so wrong? It is possible to understand the reason for wanting to make the policy change. I do not have the numbers in my head, but spending on the disability living allowance rose very fast in the period from the late 1990s through the 2000s. What I think happened was not that there was a huge amount of fraud or that the population got massively more disabled; it was just that the disability living allowance was introduced as a new benefit in the early 1990s. More and more people became aware that it was available and, as they became aware of it, they claimed it. Moving back from that situation, we are finding that, unless there is a significant change in what the DWP is trying to achieve—the personal independence payment does that to an extent, although it still aims to benefit largely the same group that DLA was intended to benefit—there is not the scale of opportunity to reduce spending that the DWP thought that there was.
Sticking with welfare, I found it fascinating that you said at your autumn statement briefing:
“If you thought the announced saving in 2016-17 was £4.4 billion not £3.4 billion you’d be right. The £4.4 billion number was just wrong.”
You then gave an interesting quote from the OBR, which talked about
“the challenge of estimating interactions between HMRC tax credits and DWP benefits in the run up to a fiscal event, where the Treasury’s policy costings process does not permit us to call on the expertise of officials across both departments on all measures that might be subject to interactions”.
Will you talk us through that a wee bit? It is interesting that the figures seem to be £1 billion out on that—£3.4 billion to £4.4 billion is a significant percentage.
The reason why I put that quote in my statement is that that was a part of the process that we had not been aware of. We had not been aware that there was that degree of constraint on the OBR’s process of costing. What that means is that, because of budget secrecy, in essence, officials in Her Majesty’s Revenue and Customs are not allowed to know what the policy decisions are in the DWP and vice versa. Therefore, the OBR cannot discuss changes to HMRC benefits with DWP officials and vice versa.
An interesting question is whether the OBR should be more insistent about being able to see that kind of information. That is partly related to the lateness of the decision-making process. Another issue might be the capacity of the OBR, which does not, for example, have its own tax and benefit model to run such changes and come up with an independent view of the effects. Sometimes, it has to take on trust the numbers that come from individual departments.
The key thing is that it is surprising that the OBR is not in a position to talk collectively with officials from the DWP and HMRC when the combined effects of the policy measures that are being taken depend on the interactions between those departments.
Absolutely. Robert Chote was here last week but, if he had been coming next week, we would certainly have asked him about that. It is remarkable that the OBR is not able to call on the expertise of officials from other departments, given the role that it has. I hope that that ability will be developed; we will certainly ask Robert Chote about that the next time we speak to him.
I have a couple more points to cover before I open up the session to colleagues. In your briefing note and your opening statement, you talked about new claimants receiving significantly lower benefits than they would have done before the July changes. In your briefing note, you go on to talk about
“2.6 million working families being an average of £1,600 a year worse off than they would have been under the current system while 1.9 million will be £1,400 a year better off.”
From a quick calculation, I have worked out the differential as being £2.9 billion. In effect, does that represent a £2.9 billion reduction?
I cannot remember the exact number, but that is broadly right. There is a £2 billion to £3 billion cut in the universal credit spending relative to the spending that there would have been under the continued operation of the tax credit system. That is precisely what the chancellor was aiming for back in the July budget, and it is driven by the reductions in the work allowances—in other words, the amount that people can earn before they start losing the benefit—as well as the reductions in what people can get if they have more than two children.
Because universal credit is structured in a significantly different way from tax credits, some deliberate changes are being made. On average, universal credit will be somewhat more generous to a group of people in rented accommodation because of the way in which the interaction with housing benefit works. As a consequence of that, it will be significantly less generous to those who are owner-occupiers.
That leads me on to the last issue that I want to touch on, which is housing benefit. In your statement at the briefing on the autumn statement, you said:
“There was also one small, but in the long run potentially important change made to Housing Benefit for social tenants. For new tenants only ... housing benefit will be restricted to the equivalent private sector rate. That won’t bite much initially, saving £225 million by 2020. Had it been imposed on all tenants immediately it would have saved more than £1 billion.”
Will you talk us through the Government’s thinking on that and the impact that it will have on finances—and, of course, the individuals concerned—in the long term?
The context for that is that spending on housing benefit has continued to rise very strongly over the past five years, despite cuts in the generosity. Although the so-called bedroom tax has had most of the publicity, most of the cuts have affected those in the private sector, in particular by reducing the limit to the 30th percentile of properties in a relatively broad area and only increasing that from 2012 in line with inflation. That means that, in effect, the amount of rent that a private sector tenant can get paid as a proportion of the total rent is falling over time.
The proposal in the autumn statement suggested that the amount of rent that new tenants in the housing association sector are paid should be limited in the same way as it is limited for tenants in the private sector. At the moment, none of the rules that I described affects tenants in the social sector. Obviously, most people’s rents in the social sector, including the housing association sector, are not above private sector rent levels, but an increasing fraction are above those levels, particularly if they have new tenancies, which are set at a relatively high proportion of the private sector average rent. A number of those rents will be above the 30th percentile on the 2012 indexed private rent.
10:00As you said, we estimate that such a housing benefit restriction would save about £1 billion if imposed immediately on all tenants. The Government has decided to do that only for new tenancies, so the savings in the short run are much smaller. At a minimum, one would expect that saving to hit the £1 billion mark over time, as everyone flows through the sector. It is more likely to have a bigger effect than that, because the expectation would be that, over time, average rents in the social sector will rise more than inflation, which is the cap on the private sector housing benefit levels.
A big announcement in the July 2015 budget was that social sector rents will be capped at 1 per cent below inflation, so rents will not rise over the next five years. However, certainly in something like 25 or even 30 of the past 30 years, rents in the social sector have risen more quickly than inflation, so the expectation would be for that to bite more in the long run.
The final point is that there is a question about exactly where private sector housing benefit policy is going. As I said, we have a world in which the amount of housing benefit that I can claim depends on the 30th percentile rent in 2012 in the area where I live. Will that still be the case in 2030? If so, that would be the somewhat odd situation in which I might be able to get most or all of my rent paid in parts of the country but only a small fraction of it paid in other parts of the country, depending on what has happened to relative rent levels. If that were to happen, housing benefit would be almost completely disconnected from the rent that anyone pays. There are reasons for thinking that that might not be a bad idea, but it would be very different from the situation that we have been used to.
What if the percentile were to change to, for example, 25 or 35 per cent?
Again, that would obviously impact in different directions.
Thank you.
I will now open up the session to colleagues round the table.
Good morning, Mr Johnson. I think that it would be fair to say that, when Mr Chote was before the committee last week, he indicated the vulnerabilities surrounding the £27 billion uplift or, as he put it, the money that was
“found down the back of the sofa.”—[Official Report, Finance Committee, 6 January 2016; c 3.]
You, too, seem to have indicated that it would not take a lot for that money to start to ebb away.
Mr Chote said that the chancellor has effectively front loaded the policy giveaways off the back of the uplift, with a view that the revenues would accrue later and smooth things over the five-year period. You have indicated that reductions to the sum might well occur. If there is no ability to skim off the top because the giveaways that have been announced have already happened, will that result in deeper cuts having to take place over the remaining period?
I have two points to make on that. First, the £27 billion number annoys me, because it is one of those numbers that is cumulated over four or five years—I cannot remember which—so it is nowhere near as big as it sounds. On the chancellor’s target for 2019-20, I think that the forecasting change is about £4 billion in that year, so £27 billion is not quite as big as it sounds.
Secondly, as I have indicated, a £4 billion change in forecast four years out is almost neither here nor there. It is slightly odd for the chancellor to make big decisions about whether to protect the police on the basis of a figure that is probably going to shift around by £4 billion at every subsequent fiscal event.
You are right to say that, if we look at the planned spending cuts and at the implied profile of cuts, we see that they have become much flatter. We are still aiming to get to much the same place as we always were in 2020, but instead of going sharply down and then a little bit up, we are going on a gentle glide path, so the protection relative to previous expectations is coming in those early years. The implication of that is that, if we need to do more in 2019, any change between 2016 and 2017, or 2018 and 2019, will have to become sharper, so it becomes more difficult to achieve steep spending cuts in a single year.
That is one of the consequences of having such an inflexible but stark fiscal rule; it becomes more stark as we get closer. Suppose that, in 2018, forecasts for 2019 change significantly, changes will have to be made quite astonishingly quickly in order to meet the rule. Even one year out, forecasts can change significantly. Therefore, the short answer to your question is that I agree that the relative giveaways were in the early part of the Parliament and that, if forecasts change, it will become more difficult to make the sharp adjustment to meet the target in 2019.
Presumably, as you have indicated, if it becomes more difficult to make sharp cuts in a one-year period, the only two options that will be left on the table for the chancellor will be to increase borrowing, which would interfere with his fiscal rule, or to increase taxes.
That is the natural implication, yes. There are other things, given the way that accounts work, that can be done at the margins, such as selling off more stuff, but broadly speaking those are the options.
Is there a risk that in-year adjustments could be made, or are we at a stage where it is too early to predict that? Of particular relevance to us in the Scottish Parliament is the fact that we rely on the budget being set at the beginning of the year and on that carrying through. Sharp in-year adjustments would obviously have an impact on devolved services, as well as on wider UK services, particularly in terms of our ability to offset that. Even if we were to take on board the powers that are coming, there would still be limitations on how much offsetting could be done.
Over the previous Parliament, a number of in-year adjustments were announced as late as the autumn statement for the same year, which appeared to reflect—although I do not know how closely—views about the degrees of underspending that were going on in any case. Those in-year adjustments in a couple of the years of the previous Parliament were quite significant. The way in which the fiscal rule is construed would mean that, if in the autumn statement of 2018 there was a forecast for 2019-20 that had moved such that it looked as if there would be a deficit in 2019-20, it would not require an in-year adjustment in 2019-20—in other words, in the last four or five months of that year—but it would require, at that very late date, a change in the spending expected in the following year. Although I do not think that it would necessitate in-year adjustments, it certainly might necessitate very-close-to-year-start adjustments, and potentially quite big ones.
It is difficult to predict with absolute certainty, but I guess that the likelihood—based on the current economic circumstances and the projected future economic circumstances—is that, if there were to be in-year or late-year adjustments for the following year, those adjustments would be more likely to be unfavourable than favourable. Would it be fair to say that?
We have only two more months’ information than we had back at the end of November, but most of that information has been bad, so I think that that has moved the risks in that direction.
You said that, according to the OBR, there is a 45 per cent chance that the fiscal target will not be met. Is the IFS as bold as to suggest a percentage? If not, what is your personal view?
I think that the OBR’s calculation is based on a methodology that we developed at the IFS, which is not terribly scientific but is a look back at what has happened over the past 30 years. It involves taking each of those 30 years and looking at the forecasts for five years from that point, ascertaining how wrong they were and by how much, then assuming that we are in a similar position now looking five years hence and considering what the likely error will be, based on the errors that were made in the past.
We might think that fewer errors will be made now, because we have an independent OBR—which might be doing a better and more honest job of forecasting—or because we think that we are on a relatively stable growth path that will not change dramatically. In that case, we might make the confidence intervals tighter. Equally, we might think that we remain in very much unknown territory in relation to how the economy is developing, with all sorts of things going on externally, such as the chance of our leaving the European Union. In that case, there might be more uncertainty than usual and the confidence intervals might need to be wider.
I do not know which of those worlds we are in, so to base the calculation on historical experience might be the best that we can do. It is really just historical experience that is telling us that there is that degree of uncertainty, and 45 per cent is probably the best shot that one can have at putting a number on that. It kind of makes sense, too: 45 per cent is just better than evens and, given that the target is a £10 billion surplus and that £10 billion out of £800 billion is a pretty small amount, we would not expect, four years out, anything very much better than an evens chance.
We have had bad news recently, given what has happened to the FTSE, concerns about China and so on. Can you see potential positives and opportunities on the horizon, which might help in relation to the 55 per cent likelihood that the target will be met? It is easy to see things that we ought to be concerned about, but are there things that might help us to do slightly better than we are projected to do?
There remains a lot of uncertainty, in particular about the degree of unused capacity in the economy. There are certainly forecasters out there who think that the OBR is being unduly pessimistic about the level of unused capacity and therefore about the economy’s capacity to grow.
There continues to be a dispute about how much capacity was lost following the financial crisis. The consensus is moving towards the OBR’s position, but some people certainly think that there is significantly more capacity in the economy and do not think that we could possibly have permanently lost as much as we might appear to have lost since 2010. That is reflected to some extent in the fact that, although unemployment is still very low, there are still quite a lot of part-time and self-employed workers who might want to move into different roles, and the fact that there is still quite a lot of capacity for companies to invest, for example.
Equally, on the earnings and productivity side, there might still be some catch-up to come. Earnings and productivity have done very poorly over the past five years. The OBR’s judgments are in essence based on an assumption that growth will move to a normal place and everything that we have lost over the past five or six years is lost for ever. We would require to get only a bit of that back to make a fairly significant difference to the forecast. If earnings are 1 per cent a year more than is expected, the forecast changes really quite significantly over the medium term.
There are quite a lot of things to which forecasts are sensitive, hence the uncertainty around them. There is still a lot of uncertainty about the direction of the economy, because we are still in unknown territory, and some of the uncertainty will be on the up side as well as the down side.
Can you explain something again just for clarity? You said that the figure of £27 billion annoys you. Is that because it is effectively the result of quadruple—or quintuple—counting?
10:15
It is one of those. The amount is accumulated over several years, so it is very difficult to make sense of it—if it accumulates over enough years, any number gets big. There is nothing special about a number accumulating over four years—or five; I cannot even remember which it is. The number that the chancellor is aiming at is £4 billion, which is the difference in the forecast for 2019 as a result of the forecasting changes.
You have just provided my favourite quote this week:
“if it accumulates over enough years, any number gets big.”
That is one to stick with.
You talked a little about the unprotected departments and the gearing effect. This time round, the changes are quite small because the gearing meant that the cuts were, as you said, substantially reduced. The next forecast is only a couple of months away, so let us use the example of the next autumn statement, which is a bit further away. If the opposite happens—if there is movement of the same magnitude in the opposite direction—is there a likelihood that the gearing effect could work in the opposite direction?
That is the big question about the next two or three years. The obvious arithmetical answer to the question is yes, that is what would happen. On whether I really believe that, if that happened and the chancellor needed to find £10 billion of additional cuts, he would move back to whatever that would require, such as a 20 per cent cut in police funding, an additional 10 per cent in local government funding and so on, the more realistic answer is that I do not know. It would be a strange world in which what one thought was the appropriate funding for some of those core public services bounced around by a significant amount as a result of what are relatively small forecasting changes. That would be an odd kind of world and I think that the chancellor would try to avoid doing that, by either raising taxes, finding some other changes in the accounting or putting his fiscal rule out further.
In a way, that would appear to be a residual. If the chancellor were to say, “I will not put up taxes further, I am absolutely committed to my fiscal rule and I will protect the departments that I have said are protected”, the unprotected departments would be the residual—they are the things that would suffer. If the chancellor found himself in that position, he would face some of his biggest political and economic choices, and I do not know quite how he would jump. Arithmetically speaking, if those other things are fixed, that is where the adjustment would have to be made.
It is worth saying that some quite significant tax rises were announced in July and in the autumn, most of which were not in the Conservative manifesto, so we have seen some willingness to raise taxes and perhaps there will be further willingness to do that—I do not know.
You just mentioned tax rises, so let us move on to one of those, which is the supplementary charge on stamp duty land tax for second or additional homes. Has the IFS done much work on the potential behavioural impact of that charge? Could it impact on the market more widely than affecting only second homes? What work have you done on that?
We have not tried to—and I do not think that we could—estimate what the effect of that will be on house prices, for example. I will say two things about the charge. First, the rationale that has been given—that the tax system treats those who buy to let significantly better than it treats owner-occupiers—is not a terribly good one. I just do not think that that assumption is true: owner occupation is still relatively favoured in the tax system.
There could be a much better rationale. If the Government wants to increase owner occupation rates for whatever reason, it should consider one of the factors that are reducing owner occupation, which is that there is a group of people in the population who are very asset rich. They are mostly people over the age of 50, who may have bought a house some time ago and paid off the mortgage, and who have done relatively well in occupational pensions and so on or have inherited something.
They are competing in the housing market because they want to buy a second house, which they have seen has been a very good investment over the past 30 years. That is pushing up prices further. Generationally speaking, that is disadvantaging younger people who want to get into the housing market. From an equity point of view, we would rather that home ownership was spread out across that population. We therefore want to find some way of disincentivising or discouraging people from moving into the housing market as second-home owners. That seems to be a coherent argument. It is not the argument that the Government put, but I think that it is a more coherent one.
It feels slightly odd to be protecting those who are already second-home owners in this market. The measures will effectively only penalise those who want to move into being second-home owners and, broadly speaking, it will leave those who have already benefited protected.
But you have not had the opportunity to look into the behavioural impact and you are not planning to do work on that.
No. That would be quite difficult, frankly.
I have another slightly difficult question to ask. In your view, when will interest rates go up?
I do not know. Seriously, it is not part of our remit to consider that. We try not to make forecasts.
Fair enough. Thank you.
I have only a small question, as most of what I was going to ask has already been covered.
I wonder whether I might explore the matter of oil prices with you. In particular, both the OBR and the Scottish Government’s own “Oil and Gas Analytical Bulletin” have overestimated the price of a barrel of oil. That has significant consequences for the economy and for the budget, I would have thought.
Given that, yesterday or the day before, Morgan Stanley was predicting a price of $20 a barrel, at what stage does the OBR reassess its estimates? How does that feed into the process?
The estimates for direct revenues from the North Sea are pretty close to zero already, I think. I do not think that the immediate impact of any changes on those revenues will be great.
The second question here—which is one of the big questions facing the chancellor in March—is whether he is going to take advantage of the situation to increase tax on petrol, for example. The price of a litre is now at its lowest level in real terms for some considerable time.
I note that the policy statement in 2011 or 2012 described a balanced tax system whereby, if prices were high, excise duty would not be increased, whereas, if prices were low, they would be increased. That would trigger an increase in petrol taxation. I wondered whether we might see that in the autumn statement, but we did not. I am now wondering whether we might see that in the budget—I do not know whether we will. Given the other things that we have been saying about the uncertainty around the public finances and so on, that at least is an obvious option for the chancellor.
The position provides something of a boost for other parts of the economy. If people are spending less on petrol, they might well be spending more on other things. As for the way in which the OBR considers the matter, there was a moment when people were saying that, because petrol prices had gone up and we were getting more VAT on petrol and so on, that ought to be good for the public finances, but the OBR came back firmly and said no, that was not true, as the money that people were spending on petrol was not being spent on other things. Clearly, the reverse is also the case.
It comes as a surprise to a lot of people that the OBR did not account for the fact that there seems to be a strong correlation between oil prices going down and poor performance in the stock market, which we might have expected to go in the other direction. That appears to be associated with the drop in demand in China and some other countries, which has created the fall in oil prices and in share prices for oil-exploring companies and so on, with a negative knock-on effect—rather than a positive knock-on effect, as most models would have said we would have previously.
I am curious about what you think would be the greatest risk you would face if you were chancellor. We know about oil prices and fluctuating markets—you presented us with a picture of doom and gloom almost to condition us for what is to come. What is the greatest risk that the chancellor faces?
My guess is that the risk that he would not want to have to deal with would be our leaving the European Union. The uncertainty of the impact of that on pretty much every aspect of the economy would be very tough for the Treasury to deal with. I do not know what the effect would be in 10 years, but I think that in the short run the effect would be quite a lot of volatility in one direction or another. The chancellor would not want to face dealing with that risk within the current set of fiscal frameworks and given the current set of forecasts.
We have covered quite a lot of ground already, and I just want to go back to the 3 per cent on stamp duty land tax in the UK and on land and buildings transaction tax in Scotland. Gavin Brown asked you about that as well, and you said that it was ill designed. The concept is to protect existing owners. What is an alternative to that? Would doubling council tax if you have a second home be an alternative?
Yes. It depends what you are trying to achieve, but if you want to increase taxation on owners or occupiers of second homes, the obvious approach would be to do something with council tax rather than with a transaction tax.
I think that the chancellor is trying to achieve what I tried to set out earlier, which is about changing the balance of power in the market between generations, as much as anything else, or certainly between those with substantial assets and those with fewer assets. Part of that ought to be about increasing the cost of owning a second home as well as the cost of buying it. You can most clearly reflect the cost of owning it through council tax. You might also think that there is something more equitable about doing that, in the sense that you would be hitting those who are already property wealthy as opposed to those who merely want to become property wealthy.
The crucial thing is to be absolutely clear about what you are trying to achieve. My problem with the proposal is that it does not achieve a balance in the tax treatment of owners of first properties and buy-to-let landlords, which is what it was described as achieving. It might achieve something else that you want to do, but it does not achieve that levelling of the tax playing field.
We still have to explore the measure because it has only just been announced—we will do that later this morning. One suggestion is that it will be very easy for people to avoid the tax and that it may raise very little because people will either incorporate or they will just say that it is their next new home and that they are going to sell the old one, but then never actually sell the old one. Are you concerned about the amount of money that it will raise?
I would certainly be concerned about the amount of complexity that it might create for exactly the reasons that you describe. Any kind of incorporation will clearly be benefited by this, as you say. Exactly where the line is between an owner buying a property with a bridging loan while selling their own home and buying a property as a second home outright will create many pages of tax law.
I suspect that the Treasury and HMRC will find a way of raising a reasonable amount of money, but perhaps not quite as much as was intended. I think that they will do that by imposing quite a lot of cost on people; not financial cost, but bureaucratic cost.
That is helpful.
The last section of your comments covered devolution—in its variety, not just in Scotland. You specifically mentioned the 12.5 per cent corporation tax rate that is expected in Northern Ireland in due course. Is that just of minor interest to us and the rest of the UK in that it will let it compete with the Republic of Ireland, or is there a risk that it could have an impact on the whole of the UK’s taxation income, because companies like Starbucks might go to Belfast to pay less tax?
10:30
I think that it might do the latter. It will be a quite a big change to the UK tax system. As you know, we have always had a single corporate tax system. The rate will clearly provide incentives to be registered in Belfast as opposed to in London or Edinburgh.
Again, there will be reams of legislation to try to control such behaviour and activity, and there will be very clever people trying to get around it. HMRC and the Treasury are worried about how it will develop and will keep a close eye on it.
It is also worth saying that if Northern Ireland goes down that route, it will be taking a major gamble with its own budget, because it will cost something like £0.25 billion in the first instance, and I am pretty sure that the Treasury will make sure that Northern Ireland bears that cost. Therefore, there is firstly the question of whether or when it will ever recoup that cost, and secondly the question of how the budget will respond in the meantime to cover that significant up-front cost. The way in which the rate is implemented and how the devolved budget copes with that will be at least as interesting as how firms respond and how the Treasury and HMRC try to stop them responding.
In the same section, you mention the fiscal framework and the fact that
“We still don’t know how devolution to Scotland will work in practice”.
Does that issue have any impact on the UK’s finances as a whole or is it a question of, “There may be an extra £100 million to spend in Scotland and £100 million extra to spend in Birmingham”—a purely internal thing? You are mainly looking at things from a UK perspective. Do those issues affect the UK as a whole?
Yes, they can, for two reasons.
First, there is the way in which the block grant adjustment is made. If the way in which it is determined in the future is more or less generous to Scotland, by definition it will be more or less generous to the rest of the UK. Obviously the gearing ratio means that it matters a lot more to Scotland, because £1 billion is a much bigger proportion of the budget in Scotland than it is in the rest of the UK. Some of the work that David Bell and my colleague David Phillips have done together suggests that reasonable alternatives could make a difference of £1 billion over a 10-year horizon. However, that is £1 billion that Scotland would or would not get that the rest of the UK would or would not get, so, yes, it is a zero-sum game in terms of how much goes where. That is one part of it.
The second part is more complex and is to do with how, if at all, the framework is designed to compensate the rest of the UK for changes that are made in Scotland. For example, if you were to make a change to income taxes that brought income or people from the rest of the UK to Scotland, would you need to compensate the rest of the UK, or vice versa, depending on what the rest of the UK does? My guess is that we will end up with a framework that does not try to do that, because it is just too hard. However, you might think that there are elements of that in there and, if there were, exactly how that is designed would make a difference.
I suspect that the first thing that I said is more important, though: the actual way in which the block grant adjustment is indexed. David Phillips and David Bell set out three different alternatives for doing that, which result in different amounts of money being distributed between Scotland and the rest of the UK.
I presume that, in the long term, if Scotland got a raw deal and we had more poverty here, that would impact on the whole of the UK. I hope that that would not happen in the short term.
Yes.
Thanks very much.
I want to ask about the policies that are set in order to have a reduction in the national debt. Everything seems to be geared towards that, but what happens after that? What is the thinking behind the austerity policies that we are seeing and the vision? The amount was going to be cleared by the end of the previous Government term and there is an ambition to clear it now. A lot of people are thinking that they just have to live through it and then something interesting will happen but, in the meantime, three new food banks are opening every week in Britain. Who looks at the devastation of that?
Earlier on, you talked about the changes to the welfare system, which had to be delayed a bit. I think that they were stopped because of the extraordinary havoc that they would wreak on people at the very bottom end of the income bracket in this country. At what point do you have an opportunity to reflect on that and to challenge the chancellor on some of those policies?
Let me take the first part of that question first, which was about what is happening to the deficit and the debt and what the plans are. You are right. The original plan was to have the deficit broadly sorted by now, but the plan now is to get to a balance in 2019. To be clear, the debt will still be around 75 per cent of national income by 2019.
Beyond that, the Government’s plan is to run a surplus each year in normal times after 2019. The reason that it would give for that is that even running a surplus at the level that is planned for 2019 every year through to the mid-2030s would bring debt down only to where it was just pre-recession, and that is if there are no further recessions. If there was one additional recession, which we might expect between now and the mid-2030s, debt would still be at the mid-50 per cent level even with a surplus in normal times by the mid-2030s. That would be the thinking behind getting to a surplus and then trying to maintain a surplus over that period.
It is also important to be clear that, over the period even after the 2030s, we will continue to be in a world in which demographic change is putting additional pressures on the public finances. We are not aiming for, and the Government is not looking at, a wonderful period after 2020 in which the floodgates can open and public spending can start to rise significantly. As I understand it, this is not a period of austerity to be followed by a period of plenty.
There are, of course, huge uncertainties about all of that, but that is where the plan is and that underpins why the Government is trying to achieve what it says it is trying to achieve.
The Government would say that that is all terribly important because, if we were to enter another significant recession with debt at 70 or 80 per cent of national income and that were then to rise to 120 per cent of national income as a result of that recession, the consequences of possibly losing access to international financial markets or of big increases in interest rates would be devastating. That is the defence. The issue is really how much weight we put on that potentially devastating outcome.
We have never defaulted on debt, but in our lifetimes we have had to go to the International Monetary Fund. Our economy policy was taken over by the IMF in the late 1970s, and the Government wants to avoid that. I put a very small probability on that risk, but the consequences would be very significant.
That is what the Government is trying to achieve and why it is doing it. There is clearly an alternative that would achieve the same thing while not cutting welfare and other spending quite so much, and that is to increase taxes. Tax is about 36.5 per cent of national income, which is relatively low by European Union standards—certainly by the standards of the EU 15, it is one of the lowest percentages. From an economic point of view, there is nothing to prevent us from having tax at 38, 39 or even 40 per cent of national income. It is a big political and social decision. Where we are on tax now is actually where we have been for the past 20 years or so—around 36 or 37 per cent.
My view is that the big political economy debate ought to be more about what we think the sustainable size of the state, and hence the sustainable level of taxation, is, rather than about whether we can borrow £30 billion or £40 billion every year going forward. I suspect that, in the long run, the associated risk is significant—there are costs associated with increasing tax—which is why the trade-off is so big.
That trade-off is exactly as you described it—there are those who are suffering, particularly from cuts in welfare and, for a group of individuals, the universal credit system will be significantly less generous than the tax credits system. As I said at the beginning, in the longer term context, by 2020, our spending on working age welfare will be at its lowest level for about 30 years, although not our spending on in-work working age welfare, interestingly. In 2020, the universal credit system will still be very much more generous than the family credit system was back in 1997 and, on average, at least as generous as the tax credits system was in 2003. It is important to be clear that the change is a reversal of some of what the previous Labour Government did; it is by no means a reversal of everything that it did with tax credits.
We recognise that there is benefit fraud, but it is always a very small amount compared with the amount of tax fraud or tax avoidance. What discussions are there about companies that are registered in offshore tax havens or whatever? Is the Government frustrated about them? Does it believe that they should be hauled back and that Britain should get the tax that it deserves?
That is an interesting question. We might learn quite a lot more about that in the budget, because the Government will have to start responding to the Organisation for Economic Co-operation and Development’s work on base erosion and profit shifting, which is looking specifically at how to ensure that companies pay tax in the places where their real activities are.
There is a series of issues there. One is about how we define permanent residence, as it were, for companies, and there are likely to be some changes to that. The Government has indicated that it will want to change that in a way that is likely to mean that we will get some more tax from some of the companies that you will be thinking about.
The second issue—and probably the biggest for the Government—is how it decides to treat interest deductibility for corporation tax. That is one of the areas where the UK system is more generous than the system in many other countries, and is significantly more generous than that which is recommended by the OECD. If the chancellor were to limit that tax deductibility, that would be a big policy change and, actually, a reversal of what he has said in the past, so that might be one of those areas where we do not implement what the OECD says is best practice.
There is a third set of questions around whether we adjust our patent box, which is a lower rate of corporation tax on companies that can show that activity comes from something involving a patent, or adjust it as a result of evidence that the activity that got the patent occurred in this country.
Therefore, a number of questions arise from the OECD proposals that we hope the chancellor will respond to in March.
It is important to be clear here: there are areas in which other countries see the UK as a place where companies go to pay lower tax than they would elsewhere. We have quite a generous patent box regime and a low corporation tax rate, for example. Therefore, not all the money will flow to the UK; other countries will want to repatriate, as it were, profits that are currently booked in the UK. I do not even know in which direction the impact on UK corporation tax would go if all of that is implemented.
10:45
Thank you.
Thank you. That concludes the committee’s questions, but I have a few follow-up questions to ask. On the question that Jean Urquhart asked, surely there is an issue about competitiveness. If you are running a Starbucks and I want to set up another company in the same market, and you are not paying tax but I am, you obviously have a competitive advantage that skews the market. Taking into account the discussions at OECD level, which I know can drag on for a considerable period of time, what is there to prevent the UK from deciding that any money that is generated by businesses in the UK has to be taxed by the UK?
It is to do with the definition of the word “generated”.
A lot of these places are fixed. A Starbucks, for example, is not going to move around. It is on the high street. If it is generating an income that generates a profit that is subject to taxation, what is preventing the UK Government from taxing the profit generated in that particular area or in the UK itself?
I realise that the issue is more difficult for other companies, but surely it is not beyond the wit of Governments to do that now to an extent, even without an OECD agreement, which would be beneficial.
My response about what you mean by the word “generated” was a serious response. That is what underpins the international tax treaties. I do not want to talk specifically about Starbucks—
It was just that John Mason mentioned it so I was carrying on from that.
That company’s profits are taxed elsewhere, particularly in the Netherlands, because that is where the intellectual property is said to sit for the recipe, or whatever it is. As part of legally binding international tax treaties, we recognise that those profits are partly not generated here, but there, and that the tax is paid there rather than here.
There are internationally generated legal constraints on taxation and the OECD base erosion and profit shifting process is trying to adjust to some extent to achieve exactly what you are describing, which is to ensure that more tax is paid in countries where you and I might reasonably think that the profits are being generated.
Part of the answer is that you cannot do it entirely by yourself. You have to do it as part of an international process. None of the companies is claiming that no profits are being generated in any particular place, but a set of international rules determines where that generation is recognised and where it is not, and the rules are not something that a country such as the UK can just tear up by itself; it has to act through international processes.
The much-used concept of reasonableness does not really come into play because the recipe for a coffee is not too complex. Most of us could work it out.
Jean Urquhart wants to come in.
Will such change be made easier or harder by the introduction of the transatlantic trade and investment partnership?
I am afraid that I do not have a view on that at all.
We are really pinning you down.
Moving on to something else, the matter of oil prices was raised by Jackie Baillie. You talked about the possibility in the budget of an increase in taxation. Everyone across the globe pays an internationally agreed price for oil, whatever that barrel price happens to be. Would a tax rise have an impact on UK competitiveness? If there is a higher taxation level on what is paid at the pump and by businesses in the UK, relative to other countries, would that have an impact?
Although the oil price fall has been very damaging in the north-east of Scotland and around Scotland, other industries have obviously benefited from it. Is there a sliding scale in relation to the taxation of oil, whereby a penny increase has an impact in the form of X thousand jobs? Is that a kind of model that the chancellor has and uses?
I do not know whether the chancellor has a model.
Does the IFS have one?
We do not, although you could probably create something like that.
Your point is important. Clearly, in general, lower energy prices are good for economic performance. There are two consequences of increasing taxes on petrol: one is that households have to pay more; the second is that, because the tax is also paid by lorry drivers and van drivers, businesses are paying more. Part of the cost of increased petrol prices is that I have to pay more for my food from the supermarket, because Tesco has to pay more petrol tax as well.
One would have to look at input-output tables to see how much of that, particularly taxes on petrol, impacted on international competitiveness. A lot of the impact will be domestic, in the retail businesses and so on; some of it will be on international business. The much bigger effect would be in relation to other energy, particularly electricity. Costs for heavy industry, for example steel or cement where a lot of energy is used in the production process, are not really determined by petrol taxes, but by other energy taxes, green taxes and so on.
We are increasing those taxes, but we have quite an extensive regime of protection for heavy industry users that are internationally exposed. If we are not very careful about the way those protections are created, there is a risk of driving industry offshore. I suspect that, while it will have some effect, a few pence of tax increase on petrol will have a pretty small effect on those very energy intensive industries relative to the effect that taxes on other parts of the energy sector would have.
We have seen that with the steel industry—the relative energy costs being credited as one of the reasons why—
In reality I do not think that that was a big part of what was doing it.
But it was one of the reasons that were quoted at the time.
Basically, if fuel duty goes up there will be an economic impact on individual households and so on.
Increasing taxes has an economic impact. Increasing a tax that is partly paid by business, as petrol taxes are, will have a direct effect on those businesses; that is one of the costs. As I said in answer to one of Jean Urquhart’s questions earlier, you can have higher taxes across the economy, but there are costs to higher taxes. The degree of that cost depends on how well the taxes are designed and where they are imposed.
Yes, but that kind of tax obviously has some impact on disposable income and so on.
One of the things that we have talked about in previous years but not yet today is productivity. What is your view about where the UK is going on productivity relative to our competitors?
There has been a productivity problem across many OECD countries but, since 2008, productivity has been a greater problem in the UK than it has been for many of its competitors. That followed 25 years of quite good relative productivity performance in the UK.
It is partly the arithmetical effect of our labour market performing much better, so that we have a lot more people employed, but in less productive roles. I am probably repeating what I said in previous sessions, but we do not really understand exactly why that has happened or what will happen in the future.
There seems to be some evidence of improvement, not least that real wages have been growing reasonably well over the last 12 to 18 months. The best projections suggest that they will continue to do so, which is good evidence that there is some underlying improvement in productivity as some of the long-lasting effects of the recession and the financial crisis wear off. I would not, however, put much money on wages continuing to grow at 2 to 2.5 per cent a year over the next four or five years.
The Scottish Government said that, over the last decade, Scottish productivity has risen by 4 per cent, relative to the rest of the UK. There is clearly of potential for further productivity growth across the UK.
There is certainly potential in the fact that we have had such poor performance over the last several years and we have increasing numbers of people in low paid, low productivity work. The fact that our productivity is well behind international leaders is strong evidence that there is potential.
There are things that we could do to unlock some of that potential, whether that be planning reform, infrastructure—particularly transport—projects, or improving education and skills. All would be good for productivity in the long run. The amount that government can do in the short run—in other words, what would improve productivity in the next year or two—is probably much more limited.
In the long run, better education, research and development, infrastructure and so on could lead to significant improvements.
Yes, and there are different elements to that. We know with a significant amount of certainty, for example, that building more roads or loosening planning rules would be good for productivity. We know, however, that there is a trade-off environmentally and in terms of the impact on people living close to the additional building. We know that additional house building in growth areas would be good for productivity.
There are also things that we know would be good for productivity, such as improving the education system, where there is less clarity about the right thing to do to make it work better.
Indeed. On a final point, where do you see sterling going over the next year? I remember, growing up, that there was always a mantra about the value of the pound. That seems to have become less of an issue.
We had the euro crisis a few years ago, and over the last decade there have been quite significant differences in the value of sterling relative to, for example, the euro. In the 1980s, the dollar value went from $2.40 to $1.07 to the pound and bounced back up to $1.50 or $1.60. It does not seem to be as much of an issue as it was. Where do you see sterling fitting in to the UK’s economic objectives over the next year?
This is definitely not something that I would want to make any kind of projection on. A lot depends on what happens elsewhere, not just in the UK. What happens in the eurozone particularly will be more important in terms of the sterling/euro exchange rate than anything that happens in the UK. If the eurozone manages to remain stable and we avoid another Greek crisis, the euro will continue to do better.
Significant additional quantitative easing in the eurozone may weaken the euro relative to sterling, just as quantitative easing here in 2010 weakened sterling relative to other currencies. I would not want to say much more than that.
Thank you very much. That has been as always a very interesting session. Are there any further points that you want to raise?
No, that was plenty.
Fair enough. I suspend the meeting to enable witnesses to change over.
11:00 Meeting suspended.Previous
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