Treasury Committee
Wednesday 4th November 2026
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14:22
Speaker 1
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Speaker 1
Order, order! Welcome to the Treasury Select Committee on Wednesday, the 4th of November 2026. We are continuing with our sessions prior to having the Chancellor in front of the committee next week after his budget statement last week, and we are delighted today to welcome the office for Budget Responsibility and Committee members to talk through the forecasts that they produce, of course, as they are required to on the day of the budget, the so-called Blue Book. I'm delighted to welcome the new chair, Professor Jonathan Haskel, who took over only earlier this year. He's joined by the previous members of the Budget Responsibility Committee, Tom Josephs and Professor David Miles.
Before I go into the main questioning, though, if I may say, Professor Haskel, can you confirm confirm to us that you did not receive any undue pressure from ministers or the Treasury in general in preparation, in preparing the economic and fiscal outlook?
Before I go into the main questioning, though, if I may say, Professor Haskel, can you confirm confirm to us that you did not receive any undue pressure from ministers or the Treasury in general in preparation, in preparing the economic and fiscal outlook?
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14:23
John Glen
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John Glen
Yes. Could I ask you start off on economic growth. There are sort of 2 or 3 headlines generated by the budget that there were sort of 98 small measures, many of which were made a material impact, a significant downgrade on growth, modest upgrade for this year, downgrade, significant downgrade for next year, and then quite robust recovery to 1.6 and 1.8% in 28 and 29. Could you. Explain to us at the start of this session on the assumptions that go into that? Because probably people looking at this will find it strange that we had a budget where most of the measures weren't scored, and yet there's quite a lot of optimism beyond the end of next year.
So perhaps talking about the assumptions around what's happening with energy prices, I would imagine, and how that would affect it.
So perhaps talking about the assumptions around what's happening with energy prices, I would imagine, and how that would affect it.
14:24
Speaker 2
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Speaker 2
Thanks. Why don't I start? And I'm sure David would want to chip in as well. Yes you're right. We have downgraded our forecast for growth this year to around 1.25%. And next year to 1%. And then it comes back to around 1.6% before then going back to towards potential output growth. And that downgrade this year and downgrade next year is mostly, as you said in the question, because of energy prices and the negative effect that energy prices might have. Now, in the models that we work with, energy prices, when they sort of zip up, have a kind of utilization effect, firms, you know, their capital stock is less productive than it otherwise be otherwise might be.
But because we rely on the futures curve for energy prices, those energy prices then come back down again. So it's a temporary interruption essentially to the path of growth. So in the medium term, as I think, John, your question indicated, in the medium term, we're kind of back to where we were. So to unpack your question slightly, I guess that's why in the in the short term, we deviate from that medium term trajectory. And then the question is, what's that determines that medium term trajectory? And the medium term trajectory is much more determined by our overall forecasts for investment, which we're a tiny bit more optimistic about by a little bit of extra on AI, which feeds into total factor productivity.
And that gives that that potential output growth of around one and a half, well, productivity growth around 1.1%. Potential output growth of a little bit higher.
But because we rely on the futures curve for energy prices, those energy prices then come back down again. So it's a temporary interruption essentially to the path of growth. So in the medium term, as I think, John, your question indicated, in the medium term, we're kind of back to where we were. So to unpack your question slightly, I guess that's why in the in the short term, we deviate from that medium term trajectory. And then the question is, what's that determines that medium term trajectory? And the medium term trajectory is much more determined by our overall forecasts for investment, which we're a tiny bit more optimistic about by a little bit of extra on AI, which feeds into total factor productivity.
And that gives that that potential output growth of around one and a half, well, productivity growth around 1.1%. Potential output growth of a little bit higher.
14:26
John Glen
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John Glen
Thank you. That's very clear. Can I just follow up on that and say, well, in this budget, there were this large number of small measures to those looking at looking at this from the outside, they'll say, well, what was the purpose of the government's choices in terms of what what move the dial in terms of the medium term trajectory that you've explained we'd go back to after the disruptive energy shock is factored out. So when such a large number of measures aren't scored individually, how do how do we assess and how would you characterize the value of the interventions of the budget?
14:28
Speaker 2
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Speaker 2
Well, the budget was basically fiscally neutral. So it was an extra on policy measures, sort of five 6 billion in the in the near term on average, and then less five, 6 billion less in the more medium term, if you sort of see what I mean. So relative to other budgets, it was a small budget just in terms of those fiscal measures. So I think that statement one. Statement two is as as as you all know, I've got it here in the budget document itself. The chapter on there is a chapter on growth, chapter four, if I remember correctly, good growth in every postcode.
And there are a series of measures set out there, but there are not a lot of details about what those various measures are. So those measures are around devolution and some stuff around energy and so forth. When the detail of those measures comes in, then we would be in a much better position to take a view on how they would score. Sorry, does that help?
And there are a series of measures set out there, but there are not a lot of details about what those various measures are. So those measures are around devolution and some stuff around energy and so forth. When the detail of those measures comes in, then we would be in a much better position to take a view on how they would score. Sorry, does that help?
14:30
John Glen
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John Glen
Doesn't that doesn't that also mean that there is a significant level of uncertainty, given the lack of definition, on what are quite bold and strategic decisions that are yet to be unpacked, how do you sort of sort of evaluate an unfinished policy, if you like, and a strategic intent with with a level of assurance that justifies those optimism in 2010?
14:30
Speaker 2
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Speaker 2
So I guess what we'd want to look. So uncertainty is bad for investment, obviously, because firms wait to see, you know, how that uncertainty is going to play out. So I guess what we want to do, as we as we discuss in the document is we want to look at various indices of uncertainty and so forth, and just look at the path of investment as to whether that was held up. So I think that would be a kind of an early warning as to whether uncertainty about the future was somehow rather impacting on current growth prospects.
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Julie Minns
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Julie Minns
Thank you. Thank you very much, Professor Haskell. I'm interested in to just probe a little further on uncertainty, but also where. There are, as you describe in in the Blue book, a broader range of factors, many of which originate outside the UK, that may be contributing to uncertainty. You also mentioned about real GDP growth over the last year to date has been more resilient than expected. To what extent do you think that some of the uncertainties, particularly around the Middle East and and some of the some of those impacts are starting to be priced in.
And so that could be, you know, would that be contributing to potentially where there could be a reasonably more optimistic.
And so that could be, you know, would that be contributing to potentially where there could be a reasonably more optimistic.
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Speaker 2
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Speaker 2
Yes, thanks. I'll say a word and I should bring David in as well, if I may. So let me back up a second. But tell me if this is not answering your question. Of course, GDP growth has been a little bit better than most commentators expected for the first couple of quarters. So our view is that that's essentially because the lagged effects of the difficulties in the Middle East and around oil prices and so forth have yet to take have yet to sort of show through. And that's why we're more pessimistic, therefore, about the prospects for next year.
But then as far as things being priced in, as concerned, as you know, in the document, we've got a number of different scenarios which work through what the consequences might be if the Middle East situation is more protracted, or if it or if it resolves itself. David, shall I pass over to you?
But then as far as things being priced in, as concerned, as you know, in the document, we've got a number of different scenarios which work through what the consequences might be if the Middle East situation is more protracted, or if it or if it resolves itself. David, shall I pass over to you?
14:36
Speaker 3
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Speaker 3
I mean, as Jonathan said, actually, the first half of this year looked pretty, pretty strong. And in fact, our forecast for the whole of this year, I think, John, you mentioned actually our forecast for this year, 2026 is actually marginally stronger GDP growth than we thought back in March, before we'd taken on board any of the energy price effects of the situation in in the Middle East. I think what's what's priced in, and it's perhaps not so much a reflection of uncertainty, but a reflection more of the what you might call the central expectation of the people who put money on the table in the futures and forward markets for oil and gas.
And what that is, is very substantially higher levels of prices for the rest of this year and through much of next year, relative to where we were in March. Right now, oil prices for immediate delivery of oil today are something like 70% higher than they were, and gas prices probably three times as high as they were at the beginning of March. And it's very hard to imagine that unwinding very rapidly. I mean, it could who knows where things are going in the Middle East. What the market is pricing in is that those prices stay at really high levels for much of the first half of next year, and then they start gradually to come down.
So in our so-called central forecast, I mean, we assume that that is what a central forecast of what will happen to energy prices. And it it causes both a squeeze on household disposable income through, particularly in the first half of next year. It it's going to feed in. And it's already feeding into the costs of almost every business in the UK are going to use either oil or gas directly or certainly electricity. So it also pushes up inflation in the first half of next year, we think to a level maybe around about 4% at the peak, which would come in the first part of next year, it would be the peak.
That is, if you follow the path of the market expectations of where oil and gas prices go, because they do start coming down from early next year and actually 2 or 3 years down the road, they're a long way back to where they were before the Middle East situation became serious. Back, back in the in the spring. One of the reasons why we get a bit of a bounce back in growth further down the road, you just get this unwinding of the energy price shock. Of course, that might not happen, but I think it's very much two sided risk.
I mean, we could find. I mean, who knows where we'll be even at Christmas, that oil and gas prices come down a lot more sharply. And that would be very welcome because inflation will be lower next year. And, you know, if that were to happen in the spring, when we do our next forecast, I'm sure we'd be forecasting both lower inflation, other things equal and and stronger growth. And I think I'd put my finger on that really is one of the major sources of uncertainty at the moment.
There is so much volatility.
And what that is, is very substantially higher levels of prices for the rest of this year and through much of next year, relative to where we were in March. Right now, oil prices for immediate delivery of oil today are something like 70% higher than they were, and gas prices probably three times as high as they were at the beginning of March. And it's very hard to imagine that unwinding very rapidly. I mean, it could who knows where things are going in the Middle East. What the market is pricing in is that those prices stay at really high levels for much of the first half of next year, and then they start gradually to come down.
So in our so-called central forecast, I mean, we assume that that is what a central forecast of what will happen to energy prices. And it it causes both a squeeze on household disposable income through, particularly in the first half of next year. It it's going to feed in. And it's already feeding into the costs of almost every business in the UK are going to use either oil or gas directly or certainly electricity. So it also pushes up inflation in the first half of next year, we think to a level maybe around about 4% at the peak, which would come in the first part of next year, it would be the peak.
That is, if you follow the path of the market expectations of where oil and gas prices go, because they do start coming down from early next year and actually 2 or 3 years down the road, they're a long way back to where they were before the Middle East situation became serious. Back, back in the in the spring. One of the reasons why we get a bit of a bounce back in growth further down the road, you just get this unwinding of the energy price shock. Of course, that might not happen, but I think it's very much two sided risk.
I mean, we could find. I mean, who knows where we'll be even at Christmas, that oil and gas prices come down a lot more sharply. And that would be very welcome because inflation will be lower next year. And, you know, if that were to happen in the spring, when we do our next forecast, I'm sure we'd be forecasting both lower inflation, other things equal and and stronger growth. And I think I'd put my finger on that really is one of the major sources of uncertainty at the moment.
There is so much volatility.
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14:43
Harriett Baldwin
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Harriett Baldwin
Thank you chair. Mr. Josephs, in your section on migration you come up with 150,000 as a central scenario. And you mentioned that you don't yet know how the government's going to decide in terms of indefinite leave to remain. Obviously, we did get that announcement on Monday after your report was published. Is your sense that that will change the assumptions quite significantly, or is it broadly in line with your central scenario?
14:43
Chris Coghlan
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Chris Coghlan
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14:46
Speaker 1
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Speaker 1
Yeah, okay. On that point. Order, order. Order, order. Welcome back to the Treasury Select Committee. On Wednesday, the 4th of November 2026, we were just warming up in our session with the office for Budget Responsibilities, Budget Policy Committee. And I'm going to hand back to Mr. Bobby Dean MP, who was mid-sentence. Would you like to start the sentence again? Mr..
15:03
15:03
Bobby Dean
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Bobby Dean
Yeah. First of all, I wanted to refer to figure five I think is on real household disposable income and the projections of growth for the 2020s against the previous decades. Yes, the 20 tens being the lowest on record at 14%, but this one forecast to be 1.4%. So there was some discussion on committee about this yesterday. Resolution Foundation described it as catastrophic. But if we listen to the government, they are making arguments about being able to beat the forecasts and the impact of the war on Iran and so on. So I just want to unpick that you've said already that this kind of takes account of some recovery in energy prices already.
So can you tell us about what other factors are at play here that still keep that figure so low, despite your expectation that energy prices will recover? Well.
So can you tell us about what other factors are at play here that still keep that figure so low, despite your expectation that energy prices will recover? Well.
15:03
Speaker 3
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Speaker 3
Two, two major ones which are which are ongoing. The first, which has really been the story of the UK economy, almost back to just after the financial crisis, which is one of productivity growth, holding back the growth of GDP per person to levels that have been unusually low for an extended period now. And we think there's slightly better news down the road. But but really no return to the kind of productivity growth rates we saw almost every decade since the Second World War. And that's already had a very big effect on standards of living over the last 20 years.
GDP per person may may be of the order of 30% lower than you might have expected before the financial crisis. If the UK next couple of decades were average relative to the last 6070 years or so. Then there's the energy prices, which we've talked a little bit about. Very sharp increase now somewhat gradually unwinds, but has a lasting effect, certainly for the next 2 or 3 years on standards of living. And then there's an ongoing increase in the overall effective tax rate in the UK. And much of that comes because of the freeze on thresholds where people move to higher rates of income tax.
That's pushing more people into higher rate bands. It's increasing the average tax take out of people's income that comes straight out of disposable income. So those three things, which if you look much further down the road, may be lessened. It depends a bit on how much longer we're going to have the threshold squeezed. But they're really responsible for a continuation in the short term of actually some some declines in, we think, in average household disposable income, then a return to growth. But it would still mean that if you took, let's say, let's say the decade from just before Covid to where we think the economy might be in 2029.
So over that ten year period and our central forecast anyway, we think the overall growth in real household disposable income over a ten year period is about 1%, maybe a little bit north of 1%. That would be an exceptionally low growth in average household disposable income, probably unprecedented since the Second World War. Wartime may maybe be somewhat different. And it really, in a sense, started with the financial crisis. But then, of course, we've had a series of other shocks more recently, Covid being one and two very major energy price shocks. And they're they're the main reasons why it's happened.
Plus the fact that the governments, in order to try to bring borrowing down and get back to a more sustainable position, position down the road, one of the ways that is happening is through a fairly substantial ongoing increase in taxation.
GDP per person may may be of the order of 30% lower than you might have expected before the financial crisis. If the UK next couple of decades were average relative to the last 6070 years or so. Then there's the energy prices, which we've talked a little bit about. Very sharp increase now somewhat gradually unwinds, but has a lasting effect, certainly for the next 2 or 3 years on standards of living. And then there's an ongoing increase in the overall effective tax rate in the UK. And much of that comes because of the freeze on thresholds where people move to higher rates of income tax.
That's pushing more people into higher rate bands. It's increasing the average tax take out of people's income that comes straight out of disposable income. So those three things, which if you look much further down the road, may be lessened. It depends a bit on how much longer we're going to have the threshold squeezed. But they're really responsible for a continuation in the short term of actually some some declines in, we think, in average household disposable income, then a return to growth. But it would still mean that if you took, let's say, let's say the decade from just before Covid to where we think the economy might be in 2029.
So over that ten year period and our central forecast anyway, we think the overall growth in real household disposable income over a ten year period is about 1%, maybe a little bit north of 1%. That would be an exceptionally low growth in average household disposable income, probably unprecedented since the Second World War. Wartime may maybe be somewhat different. And it really, in a sense, started with the financial crisis. But then, of course, we've had a series of other shocks more recently, Covid being one and two very major energy price shocks. And they're they're the main reasons why it's happened.
Plus the fact that the governments, in order to try to bring borrowing down and get back to a more sustainable position, position down the road, one of the ways that is happening is through a fairly substantial ongoing increase in taxation.
15:04
Bobby Dean
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Bobby Dean
Thank thank you for unpacking that. That is clearer. I guess what I'm trying to get at is how feasible it is that this recovers. Of course, we are halfway through the decade already, and you've said that the energy price is going to continue for a couple more years. Are there are there any amount of government measures or realistic scenarios where you can imagine that the 2020s could recover and not end up being the worst decade? Or do you think that we're too far down the track and it seems quite.
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Speaker 3
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Speaker 3
Risks on, on, on the upside, on the good side, as well as being some on the downside. I mean, the downside one would be that energy prices, for example, don't come back down as the futures and forward prices suggest. And we stay at prices which, you know, for gas is three times as high as it was at the beginning of this year. And that that will have a lasting effect on people's disposable income, if that's where we stay. But there's, you know, as much chance in some ways that things are much better than that. I think, one, one could view the sort of futures and forwards prices as, if you will, the sort of central expectation.
And there's certainly significant probabilities that you'll be on one side or the other or other of that, and certainly not all potentially worse than than that there's a good chance that it will turn out to be better than that. We're also, I suppose, in a way, take a relatively modest view on the impact of AI. And there are plenty of optimists out there who think that even over a period as short as the next 4 or 5 years, artificial intelligence will boost productivity, and that will feed through both to incomes, although there may be some job losses, but people who keep their jobs may find their incomes are higher, along with productivity and profits, which tend to feed back into household income indirectly as well.
So I wouldn't want to paint our central forecast as one where it's either going to be that bad or worse. I mean.
And there's certainly significant probabilities that you'll be on one side or the other or other of that, and certainly not all potentially worse than than that there's a good chance that it will turn out to be better than that. We're also, I suppose, in a way, take a relatively modest view on the impact of AI. And there are plenty of optimists out there who think that even over a period as short as the next 4 or 5 years, artificial intelligence will boost productivity, and that will feed through both to incomes, although there may be some job losses, but people who keep their jobs may find their incomes are higher, along with productivity and profits, which tend to feed back into household income indirectly as well.
So I wouldn't want to paint our central forecast as one where it's either going to be that bad or worse. I mean.
15:04
Bobby Dean
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Bobby Dean
No, I appreciate that. That's what I'm trying to get a sense of is the range of plausible scenarios. So you said to the downside, we could end up in negative growth territory because it's that close already to the upside. It might be substantially better than 1.4%. Is it is it feasible do you think that they could exceed that 14% of the previous decade?
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Speaker 3
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Speaker 3
I think that would take an awful lot of good luck in a way, because it's very difficult to move the dial that much through policy. I mean, okay, not not impossible. I mean, AI has done stuff that nobody would have believed possible in the space of the last five years, and energy prices are so much higher than people thought. And they could they could drop out very sharply, but that would be some going to Mars.
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Speaker 3
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Speaker 3
It's pretty difficult in some ways to understand what's happened to productivity, because one of the big drivers over the long term productivity is what do people discover that's new, that makes them produce more output more effectively, and that drives wealth over time. So a ten year period or even a 15 year period where there were just a few fewer really transformational inventions can explain quite a lot of it. It's also been a period where investment in the UK has been pretty weak since the financial crisis, with some bits of recovery now and again. But it's I mean, the UK has never in modern history been a very high investment country, and we've certainly continued to be at the low levels of investment relative to most other rich countries.
So a combination of there haven't been many obvious transformational technologies. And I'm putting a to one side, AI to one side, because it hasn't yet probably had its major impact on productivity. And investment has been relatively low. I mean, the real technology pessimists say or have said in the past that the most transformational technologies over the last 150 years, the invention of steam engines and electricity and huge advances in medicine, we just can't expect that to keep on happening every century. And it didn't happen for many centuries, up until the 17th or 18th century, where as far as economists can make out, there was very little productivity growth for maybe a thousand years.
So the really pessimistic view is, well, we've.
So a combination of there haven't been many obvious transformational technologies. And I'm putting a to one side, AI to one side, because it hasn't yet probably had its major impact on productivity. And investment has been relatively low. I mean, the real technology pessimists say or have said in the past that the most transformational technologies over the last 150 years, the invention of steam engines and electricity and huge advances in medicine, we just can't expect that to keep on happening every century. And it didn't happen for many centuries, up until the 17th or 18th century, where as far as economists can make out, there was very little productivity growth for maybe a thousand years.
So the really pessimistic view is, well, we've.
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Harriett Baldwin
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Harriett Baldwin
Chair, Professor Haskel. One of the biggest things that households spend their disposable income on is rent. And I noticed in paragraph 3.36 that you point that out, that the 4% increase in taxes on landlords could lead to higher rents for renters. And I wondered if you could quantify that relationship for the committee.
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Julie Minns
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Julie Minns
Thanks very much. I just wanted to continue on some of the discussion on productivity. Just just firstly to just to push a little bit on the AI point where your central forecast does assume, as we broadly covered, that AI will raise annual productivity growth by about 0.2 percentage points. What evidence supports the size and timing of that contribution? There is sort of a mixed picture about AI and and also adoption by different sizes of businesses in new technology. Where do you see also some of the some of the variation, whether it is by adoption, by size of business or even by region, if that also is in your analysis.
15:06
Speaker 3
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Speaker 3
Yeah. I mean, there's, there's a lot of variation for what it's worth , amongst some of the economists who spend a lot of time in the last few years trying to work out how transformational or not AI might be. I think I may have mentioned this before, but I'll be very brief about it. Two two of the most recent winners of the Nobel Prize are absolutely two ends of a spectrum. On how much of an impact on productivity AI will be. Daron Acemoglu won the Nobel Prize, I think, 3 or 4 years ago. He thinks over the next ten years, even in the US, where adoption of AI is probably ahead of where it is in the UK, even in the US, it barely moves the dial on productivity.
Another economist, Philip Agilent, and a lot of work on productivity and on AI in particular, takes the view that it will be little short of transformation over a ten year period. And we'll get back in countries that are using AI in the UK is one of them. You'll get back to the kind of productivity growth rates that were normal. I mean, much of the period since the Second World War, up to the financial crisis, two, two and a half, 3%. Now. I mean, if that really happened in the UK, it it would generate changes just as fiscally holding other things constant, which were almost could be described as transformation of the fiscal position.
I mean, even half a percent higher productivity growth maintained over , say five, ten years is worth something like a fiscal improvement each year. By the end of that period of 50, £60 billion. So if Ajilon is right, things are going to look an awful lot better 5 or 10 years down the road. If Acemoglu is right, even our forecast, with a modest assessment of what AI does is a bit too optimistic.
And they're smart people. And, you know, they're both won Nobel Prizes largely for work in this area.
Another economist, Philip Agilent, and a lot of work on productivity and on AI in particular, takes the view that it will be little short of transformation over a ten year period. And we'll get back in countries that are using AI in the UK is one of them. You'll get back to the kind of productivity growth rates that were normal. I mean, much of the period since the Second World War, up to the financial crisis, two, two and a half, 3%. Now. I mean, if that really happened in the UK, it it would generate changes just as fiscally holding other things constant, which were almost could be described as transformation of the fiscal position.
I mean, even half a percent higher productivity growth maintained over , say five, ten years is worth something like a fiscal improvement each year. By the end of that period of 50, £60 billion. So if Ajilon is right, things are going to look an awful lot better 5 or 10 years down the road. If Acemoglu is right, even our forecast, with a modest assessment of what AI does is a bit too optimistic.
And they're smart people. And, you know, they're both won Nobel Prizes largely for work in this area.
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Speaker 2
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Speaker 2
Well if I could just come in and can I advertise table 2.2 in our report, which I think goes a little bit to your question, if I may say, which is unpacks these various effects in different sectors. And I think one helpful way of thinking about AI, which I think your question kind of indicated, is there's going to be a sector which is producing a lot of AI related goods that might be computer hardware, for example, or software, which is which is large in the UK. Then there are going to be sectors which are going to be using all of this.
So the health service will be using better software to process patients and all that sort of stuff. So what we do in table 2.2 is we look at the productivity record in the different sectors. And I just wanted to say, as I say, I think it talks to your question is in the information, communication , information and Communication technology services sector, who are basically writing software, although it's a little bit broader than that. They have productivity growth between in the last two years of 7.6%, which is an astonishing rate of productivity growth, given that the rest of the economy is growing at, you know, a couple of percent, you know, if we're lucky.
And that seems to me at least to be an indication that at least in that sector, that's a strong effect of AI. Now, as David has said, to work out how it goes out through the whole of the rest of the economy. It then depends how else that spreads in different in the different sectors. And that's the thing that we're looking at very strongly. So I hope that just unpacks that question a little bit more.
So the health service will be using better software to process patients and all that sort of stuff. So what we do in table 2.2 is we look at the productivity record in the different sectors. And I just wanted to say, as I say, I think it talks to your question is in the information, communication , information and Communication technology services sector, who are basically writing software, although it's a little bit broader than that. They have productivity growth between in the last two years of 7.6%, which is an astonishing rate of productivity growth, given that the rest of the economy is growing at, you know, a couple of percent, you know, if we're lucky.
And that seems to me at least to be an indication that at least in that sector, that's a strong effect of AI. Now, as David has said, to work out how it goes out through the whole of the rest of the economy. It then depends how else that spreads in different in the different sectors. And that's the thing that we're looking at very strongly. So I hope that just unpacks that question a little bit more.
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Speaker 2
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Speaker 2
Shall I say word on that? Sure. So again, we'll look at that. The these are experimental numbers by the ONS. As you know, they've got a different way of measuring hours because the labour force survey, you've had a lot of discussion in front of this committee on the Labour Force Survey, which has been through a whole load of trials and trials and tribulations. They've got a different way of doing it. They those revised hours data, which are doing all the work in revising productivity per hour, as you know, are not official ONS statistics, I believe I forget the exact badge.
I think they're still experimental statistics. If they are badged as official statistics, we will obviously take them on board and and rework. In the March forecast, Tom was talking about the changes that would make the March forecast, so that that might be one of them as well. But I think we have to wait for the ONS to move on this, rather than us sort of second guessing what the owner might do.
I think they're still experimental statistics. If they are badged as official statistics, we will obviously take them on board and and rework. In the March forecast, Tom was talking about the changes that would make the March forecast, so that that might be one of them as well. But I think we have to wait for the ONS to move on this, rather than us sort of second guessing what the owner might do.
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Chris Coghlan
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Chris Coghlan
Well, I'll say a bit on this. My colleagues want to come in. So as you say, we have this is the first time that we have made a sort of full assessment of the Ras, because obviously over the past couple of years, it's very much been a set of legislation that's passed through a lot of consultation, a lot of changes to secondary legislation. But we felt that at this point there were enough final details confirmed that we could take a sort of fuller view of it. I think the other thing to say is that over the course of that sort of two year, whatever it's been process, it's definitely the case that a number of the elements of it have changed quite significantly since the initial proposals , in a way that I think we basically see as having less of a impact on business than the original proposals would have done.
So our assessment is that we think it will have a negative impact on business costs. We have a threshold, as you know, for measures that we actually score in the forecast. as quantifiable negative impact on productivity. And we didn't. .
So our assessment is that we think it will have a negative impact on business costs. We have a threshold, as you know, for measures that we actually score in the forecast. as quantifiable negative impact on productivity. And we didn't. .
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Chris Coghlan
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Chris Coghlan
0.1% GDP? And we didn't well, we assessed it was too uncertain to say that the ERA would exceed that threshold, but it would have a negative effect. And part of the reason is that it's actually very difficult to quantify with certainty the impact of regulatory changes such as this sort of by their nature, they're kind of inherently more difficult to quantify in in a very precise way. And it's also the case that it's quite difficult to determine if you like, the sort of the wider regulatory framework within which changes such as this fit in and how they change, how they change that relative to the to the regulatory framework.
In the.
In the.
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Speaker 1
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Speaker 1
And when we produced our report on the office for Budget Responsibility, we floated the suggestion of having an eight year outlook period or 8 to 10 year period. Would you do you think you'd put a score? Would would that make a difference to how you would score something like the Employment Rights Act?
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Chris Coghlan
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Chris Coghlan
I don't think in this case it would. I mean, there are certainly some policies that we've assessed where we've said that the impact on growth is likely to sort of grow over time. Public investment is one where, when we made the assessment of the government's initial increase in public investment, we said that if it was sustained over time, you would see a bigger impact on growth over a longer, longer term time horizon. The same with the assessment we made on the planning reforms. I think in this case, actually, it's likely the impacts would materialise more quickly than for those.
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Speaker 3
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Speaker 3
I think if we saw over a sustained period that vacancies in the UK, which have fallen quite a lot in the last few years, just carried on falling and companies were consistently reporting a reluctance to hire people. And via institutions like the CBI and surveys. They were saying one of the reasons for that was this legislation. I think if that really was emerging as a clear pattern, we would then take that into account with our projections of employment, levels of vacancies and such. I think we were right now, and it's different from perhaps where we were 18 months ago at the beginning of this this journey.
I mean, the initial message we were getting from employers and a lot of employer organisations and the CBI, which people people will be familiar with, was that they were expecting a very negative effect of, of, of the proposed legislation. Then what happened, as you will know better than I was, that there were various changes, made quite substantial changes, I think. So now there are probationary periods. It looked initially as if companies wouldn't have probationary periods, zero hours contracts, I think initially were going to be essentially outlawed. And now that's not the case. And so the message we were getting was that the potential negative effects would were pretty clearly diminishing through time.
I mean, the initial message we were getting from employers and a lot of employer organisations and the CBI, which people people will be familiar with, was that they were expecting a very negative effect of, of, of the proposed legislation. Then what happened, as you will know better than I was, that there were various changes, made quite substantial changes, I think. So now there are probationary periods. It looked initially as if companies wouldn't have probationary periods, zero hours contracts, I think initially were going to be essentially outlawed. And now that's not the case. And so the message we were getting was that the potential negative effects would were pretty clearly diminishing through time.
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Speaker 5
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Speaker 5
We just turn to your your forecasting around the energy support packages that the the government announced? Your economic and fiscal outlook assumes that the energy price cap peaks in the first quarter of next year, but the cap is now predicted to be £300 higher. Is that going to invalidate your projected 0.0% inflation reduction from energy tax cuts? That's one for Mr. Joseph Haskel.
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Speaker 2
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Speaker 2
I mean, what's so tricky about it? The reason I'm hesitating about this is, of course, it depends upon what the headline wholesale prices are. The wholesale prices, as we've said, are around 47% of the final bill. So there isn't a 1 to 1 pass through from the wholesale prices to the final bill and what the cap will turn out to be. So it it's just pretty difficult to forecast what the energy price cap is going to be. And we've taken, therefore, the futures curve, which we've just been discussing as our central way of forecasting what the future cap is going to be.
But but how that will turn out obviously depends upon the types of uncertainty that we've been discussing.
But but how that will turn out obviously depends upon the types of uncertainty that we've been discussing.
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Speaker 5
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Speaker 5
Yeah. Okay. The outlook also assumes a reversal of the VAT cut on electricity and fuel duty. However, as we've seen, we politicians are quite keen in ever extending cuts or freezes. So if it doesn't come to pass that there is that reversal, will you flag that the assumed reversal of these is a risk to the fiscal forecast?
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Speaker 2
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Speaker 2
My concerned. Well I mean again from a forecasting point of view if it's a temporary measure. So like I say, as we were just discussing that measure, which comes off in July, we stop it in July and then work out the rest of the year and average over the year and so forth. So that's all rather fiddly if you sort of see what I mean. So I'm concerned for our staff's, you know, wellbeing in, in dealing with all these fiddly measures. But as far as I'm concerned, in some broader sense, those are the measures. And, you know, we'll we'll forecast as best we can on what the measures are.
Does that make sense? Go on. Tom.
Does that make sense? Go on. Tom.
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Chris Coghlan
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Chris Coghlan
Well, I guess just to add on that, so we do have a section in the report which sets out where there are temporary measures that, if you like, are reoccurring temporary measures. And we flag those as kind of risks to the forecast for the reasons you're outlining. I mean, the biggest one, the most obvious one is fuel duty, where fuel duty rates have not actually been increased since I think it's 2011 now, despite every single fiscal event, basically the government setting out a policy which suggests they will increase them at some point in the future.
That has happened again at this event. So on that one, also following a request from this committee, we do also set out the fiscal implications if the government were not to follow through and increase fuel duty rates, and our estimate is that would increase borrowing by about £4 billion a year over the forecast period.
That has happened again at this event. So on that one, also following a request from this committee, we do also set out the fiscal implications if the government were not to follow through and increase fuel duty rates, and our estimate is that would increase borrowing by about £4 billion a year over the forecast period.
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Speaker 3
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Speaker 3
I think in some ways, the biggest measure in terms of pounds equivalent to help households with energy bills was the £100 council tax deduction deduction, which hits probably 80% or so of households. And that too is temporary. It's a kind of one off in a way, and I think the reason why a lot of these measures are temporary is just because of the fiscal situation we're in, which is one where the fiscal deficit is still large. Borrowing this year is still four, 4.5% almost of GDP. If you stay in that position, you're going to blast through the fiscal targets.
The stock of debt to GDP will just carry on going up. I think the government took the view that in order for that not to happen, you could not offer a package of relief to households that was anywhere like as big as the package in 2022, which I think was probably in pounds term, ended up being about ten times bigger than this one. I'm sure the government would have liked to have done a bigger package, but they were obviously mindful of trying to hit a target which, if they miss it, would then have debt relative to GDP.
Continuing.
The stock of debt to GDP will just carry on going up. I think the government took the view that in order for that not to happen, you could not offer a package of relief to households that was anywhere like as big as the package in 2022, which I think was probably in pounds term, ended up being about ten times bigger than this one. I'm sure the government would have liked to have done a bigger package, but they were obviously mindful of trying to hit a target which, if they miss it, would then have debt relative to GDP.
Continuing.
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Speaker 3
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Speaker 3
I think it's it's partly that the labour market seems a bit softer now than it did then. I think we talked a bit about vacancies already today. If you go back a few years, the number of vacancies in the UK was about the same level as the total level of unemployment. So that's a pretty tight labour market. Vacancies have come down a great deal. And now the the measured unemployment rate is something like four times as high as vacancies, so that if you want to call it slack in the labour market, I think makes it a little bit more difficult for workers to negotiate a wage settlements which pass on most of the effects of the higher inflation.
And we think that wages will not, in the near term, rise by enough to match inflation. And that's one of the factors behind real disposable income being a bit squeezed. I think there's another factor there, which is that if one looks at the rate of return on corporate capital. It used to be a number of the order of if you go back a few years and take an average over a sort of a couple of decades, the rate of return on corporate capital, a measure of profitability, was 13, 14% or so. And that was in a world in which interest rates were lower.
So there's been a bit of a sort of double whammy there, because as far as one can make out, the measure of the profitability of the corporate sector has come down a bit. So it's more like 1011 now rather than 1314. But that's in an environment where interest rates have gone up a lot. And just to give you an indication of the scale of how much interest rates have gone up, if you go back just a few years, 3 or 4 years, the the real interest rate, the inflation adjusted interest rate, the UK government was paying on inflation proof gilts index linked gilts was -3%, an extraordinarily low level.
That's about 3 or 4 years ago. It's now plus 2%. So 500 basis points, five whole percentage points increase in the real interest rate. And that's the number you might compare with the real profitability of the corporate sector. So the profitability has been squeezed a bit. And the cost of capital has gone up a lot. I think what that means is that companies, many companies, not all will have, you know, a greater determination not to see profitability squeeze further in that environment. But one of the things they can do is push back against wage increases of the 3 or 4%.
You might need to just even match inflation.
And we think that wages will not, in the near term, rise by enough to match inflation. And that's one of the factors behind real disposable income being a bit squeezed. I think there's another factor there, which is that if one looks at the rate of return on corporate capital. It used to be a number of the order of if you go back a few years and take an average over a sort of a couple of decades, the rate of return on corporate capital, a measure of profitability, was 13, 14% or so. And that was in a world in which interest rates were lower.
So there's been a bit of a sort of double whammy there, because as far as one can make out, the measure of the profitability of the corporate sector has come down a bit. So it's more like 1011 now rather than 1314. But that's in an environment where interest rates have gone up a lot. And just to give you an indication of the scale of how much interest rates have gone up, if you go back just a few years, 3 or 4 years, the the real interest rate, the inflation adjusted interest rate, the UK government was paying on inflation proof gilts index linked gilts was -3%, an extraordinarily low level.
That's about 3 or 4 years ago. It's now plus 2%. So 500 basis points, five whole percentage points increase in the real interest rate. And that's the number you might compare with the real profitability of the corporate sector. So the profitability has been squeezed a bit. And the cost of capital has gone up a lot. I think what that means is that companies, many companies, not all will have, you know, a greater determination not to see profitability squeeze further in that environment. But one of the things they can do is push back against wage increases of the 3 or 4%.
You might need to just even match inflation.
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Chris Coghlan
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Chris Coghlan
Mr. Chair. But but you mentioned Philip again and being more bullish, but more broadly beyond AI. He, of course, argues that there are policies that governments can do to support innovation and the whole entrepreneurial system. Do you share any of that optimism that there are measures the government can do, especially around, obviously, public investment, to change that?
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Speaker 3
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Speaker 3
Yes, I, I think there are and some of them were mentioned in the budget documents by the Chancellor. I mean, one is the area of planning and planning reform. We've had we've had, if you like, phase one of that, which was directed really at residential housing back in the budget a couple of years ago, and the government is saying there is much more to do on that when it comes to business investment and planning and infrastructure and the positive impacts that might have on commercial investment. And it's kind of linked in with investments in the grid and infrastructure.
And I think I think those those are factors that have potentially helped held back in investment in the UK.
And I think I think those those are factors that have potentially helped held back in investment in the UK.
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Speaker 1
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Speaker 1
Amount of evidence that the rates of return to. scientific R&D and basic R&D are pretty large. Actually, the the nature of that in the. military kind of depends upon what it's what it's spent on now. And, and I suspect, and this is just a casual reading is, I suspect the, the types of investment one does in military R&D are very different to what they might have been done in the past, presumably in the past was about about materials and, you know, tangible things and all that kind of thing, making, you know, more bomb proof tanks and so forth.
It's probably much more oriented around software .
It's probably much more oriented around software .
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Speaker 3
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Speaker 3
That in a bit of detail. Indeed. Professor Haskell, Andrew Gwynne MP thank you sir. We're coming to spending pressures. And I was just looking at page 49 on the projected clear decline in tax revenues for both oil and gas. And it's very clear that you also include an assumption that Rosebank would be approved. I wouldn't for a minute expect you to have a view on that. But what I would just want to probe on. quickly is of that tax revenue. How much of it would come from Rosebank? Because it looks to me that at the most it would be in the low .
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Speaker 2
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Speaker 2
So we use production. investment projections that are produced by the North Sea Transition Authority. And they produce a very detailed kind of field by field assessment and projection. And for a long time, for several years, they have assumed in those projections that Jackdaw and Rosebank would go ahead and they make various other assumptions about the number of undeveloped fields that are likely to be developed in the future. So that's not a new thing I should emphasize, and it is a completely separate thing from the government's actual decision on on that field. I mean, the big picture, if you look at the forecast of oil and gas.
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Speaker 2
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Speaker 2
Is that they are have been for a long time and are projected to continue to be on a on a downward track. Currently, they're elevated because oil prices are obviously quite elevated. And we're estimating this year we raise around. 5 billion or so. But in five years time, when we assume oil and gas prices have fallen back down and production continues to decline. And also a lot of companies are using past losses to offset. Profits in terms of their tax liabilities. We currently project that overall. revenues from the whole of UK oil and gas production will fall to, I mean, basically close to zero, just a couple of hundred million in total.
So that includes all all fields. I can't give you a number specifically on. Rosebank that would actually be, you know, that's sort of confidential taxpayer information.
So that includes all all fields. I can't give you a number specifically on. Rosebank that would actually be, you know, that's sort of confidential taxpayer information.
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Speaker 2
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Speaker 2
Wondered, you know, should we read anything into that? I don't know. Well, I don't I'm not sure if it's the first time we've mentioned it, but you shouldn't read anything into it in the sense that I say the North Sea Transition Authority have had that assumption in their forecasts for, for several years. And it is sort of it's a forecasting assumption.
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John Glen
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John Glen
The government process to take a decision on this. Thank you. Thank you very much, John. Yes. Could I turn to the issue of headroom? This has come up a lot about how much it should be. The Resolution Foundation said 20 billion. The Chancellor spoke about global economic storms and chose yet chose a headroom of 15 billion. Could I ask you, if you compare that with the typical revision to your forecast between fiscal events, is the Chancellor more likely or not to use up that .
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Speaker 1
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Speaker 1
Next one fiscal event? Well, I'll have a go at that, and I'm sure David would want to come in as well. So you're right. 15 billion is small relative to the typical forecast revision. Those those revisions around 18 billion. But of course they go up and they go down if you see what I mean. So I don't think we can say .
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Speaker 7
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Speaker 7
Yeah. Go on David. I'm sorry. I don't mean to. I'm not trying to play. No, no it's okay. I mean yeah we do. And that's, that's the method by which we come up with a sort of. probability that if the government sticks to the policies that it said it's going to implement on spending and on tax, what's the. chances three years down the road that that headroom is still the right side of zero? And the answer is that it's got about a . 55. 56% chance of being on the right side. So it's better than tossing a coin, but not much.
Not all that much better than tossing a coin. And the reason the reason is not , not not because, you know, it's a crazy policy. It it's more that the headroom is it means the difference between two huge numbers. It's government spending, you know. 1.4 billion trillion rather and tax revenue, 1.4 trillion. And it doesn't take an awful lot of a .
Not all that much better than tossing a coin. And the reason the reason is not , not not because, you know, it's a crazy policy. It it's more that the headroom is it means the difference between two huge numbers. It's government spending, you know. 1.4 billion trillion rather and tax revenue, 1.4 trillion. And it doesn't take an awful lot of a .
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John Glen
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John Glen
As we discussed in previous. sessions around the previous fiscal event, how it has a material impact into the narrative, running up to a budget if it's not sufficient, because the obvious consideration then is, well, what tax changes might need to be required? Yeah. I mean, in the context of the global economic storms, it does .
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John Glen
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John Glen
You know, that's probably going to generate changes in policy. Sure. In previous answers, Professor Haskel talked about the scoring of. embryonic devolution proposals. And we know that there are some big deferred. decisions and there are big uncertainties around welfare reform, how much up front, how much savings, etc.. It does seem quite. unusual to have such a. modest I mean, you know, there are significant.
elements of unresolved policy decisions for this government that could have a material impact on public finances.
elements of unresolved policy decisions for this government that could have a material impact on public finances.
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Speaker 7
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Speaker 7
Isn't that is that not a reasonable assumption to to make? There are we and we've mentioned them already. I mean, there's a spending review coming up. There's tough decisions to make about making saying exactly which departments are going to be squeezed somewhat to hit promises that the governments have made, the government has made on, on, on defence and health and to some extent, education. So, yes, I would agree with you. There are there are big decisions to be made.
And also on welfare. And there's the Milburn report coming up, the Timms .
And also on welfare. And there's the Milburn report coming up, the Timms .
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Speaker 1
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Speaker 1
We've also set out what headroom would you need to get a 60% probability, or what headroom would you need to get a 70% probability to give one some sense of where I think you're asking, which is what's the kind of uncertainty around all of this? And if I, if I read my notes correctly, to get a 60% probability, you'd need. 25 billion of headroom to get a .
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Speaker 2
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Speaker 2
Were saying before about how this committee has requested that that number. Is that right? So, yeah, we have a legal. obligation to do our forecast based on announced government policy, which is why the central estimate of headroom includes the assumption that the latest policy goes ahead. But this .
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Julie Minns
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Julie Minns
Is as for the last 15 years, it will be to 5 billion lower. Right? That's right. Yeah. I think it's worth just clarifying that the OBR has to act on the policy as government presents it. And to date to date, yes. But government policies can change, as we know, under different governments and governments. So but that's that's the .
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Speaker 7
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Speaker 7
This forecast? There's been a bit of debate about it. It'd be good to get clarity. Yes. Net migration, I think relative to where we were in March, is lower by about. 70,000 a year over the next four years. So it's it's not trivial. It's will affect the labour force. Of course, it depends on what the people who don't come would have done had they come.
And we make the.
And we make the.
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Speaker 7
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Speaker 7
Which seems to be in line with recent history, that they have around about the same. participation rate as the domestic working age population. So it is a. slightly lower labour. force than would have been the case, because there's over 4 or 5 years, you know, almost. 300,000 people, people, fewer significant chunk of whom would have worked. GDP per person, though, which I think is a much better measure of the average standard of living of people in the country, is, is not any lower because the people that would have come, we think broadly have similar.
characteristics to the domestic population. On average, they're a bit younger and more of them work, but on average they get paid slightly lower wages. And you could describe that as lower productivity. But those two things kind of balance each other out. So the people that don't come would not have materially changed the average resources or the average incomes of people in the UK. So per capita GDP literally doesn't move at all.
characteristics to the domestic population. On average, they're a bit younger and more of them work, but on average they get paid slightly lower wages. And you could describe that as lower productivity. But those two things kind of balance each other out. So the people that don't come would not have materially changed the average resources or the average incomes of people in the UK. So per capita GDP literally doesn't move at all.
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Speaker 7
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Speaker 7
Would have been a little bit higher. That would have brought in a little bit more tax revenue. But then again. 300,000 people will draw on on, on public services. So I think our our view on that was it didn't do anything to GDP per capita, which I think is a much better measure of the standard of living of people than is aggregate GDP. And the .
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Bobby Dean
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Bobby Dean
Implications are. relatively small. Thank you. There was another bit announced in the budget about the protection of preventative spending. I'm not sure who's best to answer this question, but it kind of raises the question again, that this committee has spoken about before, about the prospect of having longer term forecasts. There's obviously a three and a five year forecast in here at the moment. Could I take Professor Haskell's view on the potential inclusion of a ten year forecast going forward, given that the government wants to invest in and make more of long term public investment?
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Speaker 1
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Speaker 1
I said this to this committee before, so forgive me repeating myself often, if you look at their graphs of GDP, for example, they're quite detailed graphs for the first five years and then for the following five years, they're just flat lines. So there's a limited information set one could get on that. On the other hand, I am sympathetic to the notion which Tom was just talking about a little bit earlier,
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Speaker 2
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Speaker 2
I can add a couple of things. I mean, one thing to say to start with is that the choice of the length of the forecasts for budgets and fiscal events is for the Chancellor, not for us. And the choice of the fiscal rule horizon is for the Chancellor. So fiscal events, this would be a decision for for the Chancellor to take. We do do longer term projections, as you know, in our Fiscal Risks and Sustainability report over 50 years. And one thing I think we could consider doing in in those reports is looking a bit more closely at the sort of next next ten year horizon for the reason reasons you set out, I think one piece of analysis in that we did in this report, which is relevant to this issue, is we looked at what was happening right at the end of our five year fiscal forecast at the current time.
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Speaker 2
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Speaker 2
Before the impact of policy measures, borrowing was increasing a little bit. And that is basically because we're starting to see some of these. pressures that we talk about in our long term report already starting to hit the public finances. So the demographic pressures pushing up. pensions is pushing up borrowing at that at that time horizon. Already we're starting to see a loss of receipts, tax receipts from things like fuel duty due to the transition to net zero, as well as the decline of production in the North Sea. And we're starting to see a big increase.
We're starting to see sort of continual increase in in debt interest costs due to the large stock of debt and the fact that the government is having to roll over a lot of debts that it originally financed at lower interest rates, and it's now we project that it will have to refinance that at higher interest rates. So you're already starting to see some of those.
We're starting to see sort of continual increase in in debt interest costs due to the large stock of debt and the fact that the government is having to roll over a lot of debts that it originally financed at lower interest rates, and it's now we project that it will have to refinance that at higher interest rates. So you're already starting to see some of those.
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Bobby Dean
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Bobby Dean
A, an increasingly difficult fiscal environment. Thank you. Can I just get a clarification as well? So in the forward you talked about how the agreed forecast timetable was largely adhered to, but there was a couple of errors this time. So small changes were made to one policy measure, which we think was related to fuel duty, because I think we've heard about that publicly, if you can confirm that. But then there was, in addition to policy measures with direct impacts on the economy, forecasts were altered after it had been finalized. You say it makes a small difference, but we still don't know what those measures were.
I don't think so. If you could share that with us and also explain to .
I don't think so. If you could share that with us and also explain to .
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Bobby Dean
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Bobby Dean
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Speaker 3
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Speaker 3
What the two policies were. Thank you. Thank you very much indeed, Andrew. Thank you. Chair. There's a lot of interest in commentary. understandably so, about UK gilts and the interest rates that we are paying relative to our peers. And Professor Haskel, if I can come to you first on this, obviously UK debt to GDP is high by historic standards, but it is still below.
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Speaker 1
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Speaker 1
Explanation for why that that is? I'm not sure we do, because this is a complicated picture. The the and David Marsh should come in the debt stance. interacts the implications of the debt stance for for for yields and for borrowing and so forth interact in a way with not only the gilt yields, but growth prospects and things like that as well. So there's a whole set of different circumstances which are kind of pushing all these things in, in different in different directions. And, you know, there might be different. So we've got a whole box at the end of the report.
As you know, I think it's box seven, where we talk about the difference between the interest rate that governments have got to pay on borrowing and the amount of growth, which affects the. numerator of the debt ratio, but affects both the numerator and the denominator. So that's that is a very complicated picture, which is hard to get at all of that. At the heart of it, I think, is the question about whether one thinks that these.
As you know, I think it's box seven, where we talk about the difference between the interest rate that governments have got to pay on borrowing and the amount of growth, which affects the. numerator of the debt ratio, but affects both the numerator and the denominator. So that's that is a very complicated picture, which is hard to get at all of that. At the heart of it, I think, is the question about whether one thinks that these.
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Speaker 7
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Speaker 7
Things like that in the economy. But but very briefly, if you could, two very quick points. I mean, the first thing is, you know, some of the countries in the euro area which have got higher debt than the UK and France, as well as Italy stands, stands out, obviously are issuing their government bonds in euros. And there's a sense that the ECB , to use Mario Draghi's words of however long ago it was, I mean, more than ten years ago now. But if a country in the euro area runs into problems that the ECB will do whatever it takes to stop that causing disruption in the euro area.
And obviously we don't have that. You could call it. protection here. I think I think it's probably been the case that it's a consistent pattern and not just in the most recent period when yields have gone up, that sterling gilt yields are a bit higher than euro. denominated sovereign sovereign debt. There may have been a time when Greece and Italy were actually higher than the UK, but in a way they they were. One of the things that kind of prompted the Draghi statement about where we're going to do whatever it takes to stop this thing falling apart.
I some, some some people look at where the yields are on gilts at the moment and say, well, they've gone up so much in such a short period of time, surely the next move is more likely to be down than up. And we've as you know, the IMF has has put put the UK in some sense on, on the on the good step and the US and France on the naughty step. So, you know, won't we come back down from here? But I think it comes back to something Jonathan just said about how you view ten year gilt yields at the moment at 5.3.
And do you view that as well. That's above where they should be. Given that the UK is trying to do something about its fiscal.
And obviously we don't have that. You could call it. protection here. I think I think it's probably been the case that it's a consistent pattern and not just in the most recent period when yields have gone up, that sterling gilt yields are a bit higher than euro. denominated sovereign sovereign debt. There may have been a time when Greece and Italy were actually higher than the UK, but in a way they they were. One of the things that kind of prompted the Draghi statement about where we're going to do whatever it takes to stop this thing falling apart.
I some, some some people look at where the yields are on gilts at the moment and say, well, they've gone up so much in such a short period of time, surely the next move is more likely to be down than up. And we've as you know, the IMF has has put put the UK in some sense on, on the on the good step and the US and France on the naughty step. So, you know, won't we come back down from here? But I think it comes back to something Jonathan just said about how you view ten year gilt yields at the moment at 5.3.
And do you view that as well. That's above where they should be. Given that the UK is trying to do something about its fiscal.
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Speaker 7
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Speaker 7
Or do you view it in a longer historical context and say five and a bit percent on ten year gilts is absolutely not unusual in history, and there've been plenty of periods when inflation is lower and the fiscal situation was a lot better than it is today, when yields were at that level or even higher. And I think there's a there's a lot to .
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Speaker 2
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Speaker 2
Forgive me. I'm turning, turning to you, Tom. Okay, well, so I mean, as you know, the current spending review period runs till 28, 29, 2930. After that, the government just sets an overall assumption for total spending. And so that estimate of real term cuts for unprotected departments is based on what that. assumption leaves those.
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John Glen
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John Glen
From the IFS that there's quite. aggressive or certainly. determined figures for efficiency gains in public services within the NHS. And they suggested that actually, you know. elevating that higher wouldn't be. realistic because, you know, you you're already making quite a lot of efficiency savings. So what I'm trying to get at is it seems that something else is going to happen in terms of policy choices for those numbers to work in terms of there not being.
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Speaker 2
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Speaker 2
Significant cuts in unprotected departments by the end of the period. Well, so on the official. efficiency targets that this government has set, we we also do flag that as a as another source of potential pressure to those to those spending numbers, in the sense that if the. efficiency targets that the government has not has set are not met, then that obviously. increases the pressure within existing departmental spending settlements. And, you know, if you look back at previous efficiency targets, the previous governments have set.
It is often the case that .
It is often the case that .
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Speaker 2
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Speaker 2
Basis for greater optimism for this government at this time? Well, we do not take a view on whether or not those. efficiency assumptions will be met, because, as I say, beyond the spending review period, we basically take the government's assumption for overall spending, and that's what we put into our forecast, because beyond the current spending review period, you know, that is government policy. Essentially, they set an overall spending assumption as policy. So what we are doing in all of this analysis is, is, you know, exactly highlighting the kind of risks and pressures around that.
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Speaker 2
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Speaker 2
Whether it's just higher levels of inflation or a bit of both. Do you have any insight? Yeah. So, well, we haven't we haven't done that kind of detailed assessment because we don't look sort of project by project. And what has led to the higher capital spending than we previously estimated. It's basically just a top down. assessment based on the kind of progression of capital spending to date through the year.
So it could be a combination of both of those things. Probably there has been some increase in costs due to higher.
So it could be a combination of both of those things. Probably there has been some increase in costs due to higher.
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Speaker 2
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Speaker 2
But also it is likely just that governments have been able to or departments have been able to progress projects more quickly than we expected. We made the original. assumption that departments would underspend their capital budgets by quite a significant amount, based on looking back at the past, at what had happened in previous periods where capital spending had been increased very quickly. And we found that in the past departments had underspent very significantly.
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Bobby Dean
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Bobby Dean
But it seems that this time that has not happened to that extent. Okay. And then the the second point was there's a commitment to. reallocate capital to. defence from other departments. Are you aware if there's any protection for any departments in that, because under are obviously things like health departments protected? Have the government made commitments .
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Harriett Baldwin
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Harriett Baldwin
For government. Okay. Thank you very much, Mr. Dean Baldwin briefly. Thank you, Professor Haskell, the biggest line item in terms of the. report is around welfare. And I note that since the last report, you revised up welfare spending by. £5 billion a year. And in terms of the upside risks and the downside risks in your.
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Harriett Baldwin
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Harriett Baldwin
You think it could be potentially if it carries on at the same trajectory, as much as. £25 billion higher than you forecast. And it's paragraph. 5.22 if you're if you're looking for it, and then if it returned to pre-pandemic levels, it could be. £13 billion less than forecast. Because these are just huge numbers. I wondered, in terms of those.
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Speaker 2
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Speaker 2
Think one of the policies was just not implemented. And the other one was it was it? Yeah. And the other one was delivered, but with. significantly less support than originally envisaged. Which I think just highlights the fact that it is, you know, it's quite difficult for us to make these sort of. assessments of the impact of departmental spending. programmes such as these employment support.
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Harriett Baldwin
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Harriett Baldwin
That that's also pretty much the same number that you think the increase in the allocation to the National Wealth Fund and the British Business Bank will be in terms of annual cost. And so I wondered if you'd made any. assumptions in your economic. forecasting around whether effectively taking capital from the private sector and giving it to the state owned banks .
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Speaker 1
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Speaker 1
To be a more or less productive use of capital. Oh, I see, no, I don't think we've thought of it that way. Actually, we've just tried to do the fiscal. arithmetic around the extra revenue that it would generate and the extra spending. So that's all all worked out. So we did do a bit of work on the extent to which we thought that bank lending might be.
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Jim Dickson
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Jim Dickson
Clearly the policy sort of. structurally ties the funding available in regions to economic outcomes. And therefore it genuinely. incentivizes those regions to take decisions which enhance economic growth in those regions, like approving housing development or regeneration schemes or transport. You've said that you think it's not possible at the moment to assess the extent to which that's going to add to growth. Do you .
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Speaker 2
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Speaker 2
When you might be able to do that at all? Do you want to speak to that? So the plans the government set out at this event were just sort of initial plans, fairly high level. And, you know, that's what they're saying themselves. And further firm details will come in in subsequent announcements. So I mean, this is just consistent with the usual approach we take to assessing policy is that we only assess policy when there's enough sort of final and firm detail to allow us to make a kind of reasonable assessment of the.
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Speaker 2
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Speaker 2
If you're thinking about the economic impact, is likely to be one that is pretty difficult to assess, because it will be very dependent on not only the final policy that the government announced, but also how it is then. implemented at the local level, and so very dependent on. decisions that local leaders take and local. capacity and all of those kind of things. And I think if you look at the kind of economic literature on this, that is basically what it says that the economic impact is, is basically very dependent on.
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Speaker 2
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Speaker 2
I mean, as you say, there are definitely potential. benefits from. local leaders and local areas being able to better target spending in their particular areas. But there are also risks, as you say, around the potential for kind of tax competition, for example, sort of race to the bottom, competition between different regions, more complexity in the tax system. There's definitely risks around kind of revenue. volatility at the local level, kind of more a narrower tax base means potentially more volatility.
And that is can be a challenge for local. administrations to deal with. But again,
And that is can be a challenge for local. administrations to deal with. But again,
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Jim Dickson
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Jim Dickson
That all very much depends on the sort of final design of the of the system. We know roughly that the sort of likely components, business rates, income tax, visitor levy, those sorts of things. Do you have your eye on any of those as. particular potential problems going forward? Or on the upside, drivers of better local .
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Julie Minns
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Julie Minns
Overall package and how it all fits together to make that sort of assessment. Thank you. I mean, what information could you talk about? Quite rightly, you have a position until it's actually happening, you can't really score it. But there's a expectation that will be white position papers coming out in ten year plan rewiring the state. How far though does that need to go before .
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Julie Minns
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Julie Minns
High level framework type detail. And of course, a lot of how this how it will be spent and the effectiveness will depend on the individual combined authority and sometimes the individual mayor. And there's a lot of we had very, very strong evidence yesterday from witnesses about a lack of accountability. At the moment, we don't know what will come out in the paper. Is there any message you've got for government about that, about how how that will help you .
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Speaker 2
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Speaker 2
Whether that every tax pound is being spent as well as possible? Well, I guess that is more I mean, our job is not really around the sort of accountability in the system. I think that's more kind of maybe an EO type area. I'd say our our assessment will be on any fiscal and economic implications. I mean, I would, you know, definitely emphasize the point you're making that this will be very much dependent on final decisions that are made at the local level. A good example maybe is devolution of tax powers to Wales and Scotland. So it took around nine years from the original announcement of devolving tax payers to.
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Speaker 2
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Speaker 2
Scotland actually took some decisions to change tax rates. So it's quite a long way off potentially. And in Wales it was about seven years before they got the powers and they've not actually used those powers yet. So, you know, if we had tried to make an assessment back when those original sort of. announcements were made of .
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Julie Minns
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Julie Minns
And obviously the surprise, I think, was, well, there was a lot of assumptions about what might happen, but the big new bit was that it was only for 15 months. So it will come to an end. Do you think that makes a difference to the way that banks behave? Did you model that they might, for example, rebalance their profits over that period of time in order to .
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Julie Minns
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Julie Minns
Temporary policies have. No I mean we just assess the policies. The government. I figured that's the case. And yesterday we heard some very trenchant evidence from Helen Miller at the Institute for Fiscal Studies about Founders Relief. She described it as a dreadful policy. I, speaking as someone who represents a lot of founders who have then sold out, some of them have stayed around, but to a big American companies and made some good money out of it. Sometimes founding another business, I should say. We can see that there are challenges with how you do do this.
What what's your assessment? Have you modelled the the. responses to this new policy, and have you got any assessment about how, whether you think it's going to actually .
What what's your assessment? Have you modelled the the. responses to this new policy, and have you got any assessment about how, whether you think it's going to actually .
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Speaker 2
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Speaker 2
On the merits or otherwise. It's just the modelling about what you think might happen is what I mean. It is actually the case that this new founders relief, it for us is a fairly small measure. It only costs around. 200 million or so I think we estimate across the forecast. So, so not not a huge change. And therefore it's not one that we .
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Speaker 2
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Speaker 2
You write. So it's not material. It's really what you're saying at this point. Well, it's obviously an important policy for those people who are directly affected. But in terms of the overall fiscal forecast, it's not a huge it's not a huge policy and therefore not one that we looked in detail in terms of the economic impact of. And also, the government also announced a. reduction in the allowance for the the bladder relief, which has a roughly.
offsetting cost. So there was, you know, there were more than one.
offsetting cost. So there was, you know, there were more than one.
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Speaker 2
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Speaker 2
The measures were. relatively kind of small scale in terms of the overall fiscal impact. And therefore, we didn't make a kind of detailed assessment of the economic impact that they that they would have. I mean, that's not to say that they won't have important impacts for those people or businesses that they're particularly targeting. But from a macroeconomic perspective, which is, you know, which is what our job is to look at the kind of macro economic and fiscal impacts of these.
We didn't we didn't make that kind of assessment for these these measures.
We didn't we didn't make that kind of assessment for these these measures.
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Harriett Baldwin
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Harriett Baldwin
Want to add anything on that. Okay. Thank you, Dame Harriet. Yes. One of the biggest revenue raisers in this budget was the. enthusiastic backing of HMRC to manage to get more money from taxpayers. And one of the ways that that's obviously happening is. because more and more people are having to fill out. self-assessment forms, I think that you've got a. 17% increase in people who are having to fill out .
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Speaker 2
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Speaker 2
Through HMRC resources being boosted? Well, so it's definitely an area that we highlight is very uncertain and there's quite a lot of risk around the the estimates we make of the additional revenue from kind of compliance. measures and measures which aim to. reduce tax debt. And we've got quite a lot of analysis in the book. around the way in which we assess individual measures of that type to try and ensure that the estimates are central. So we do a lot of work with HMRC to think about, okay, this measure will target this. non-compliant section of the taxpayer.
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Speaker 2
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Speaker 2
Collects and the tax that it could theoretically collect. An enormous number, with the difference being being the tax gap that has been relatively stable in outturn over the past few years. We our forecast assumes it will fall basically because of all the additional resources that HMRC is putting into tax.
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Bobby Dean
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Bobby Dean
There seems to be quite a bit of money coming in from moving tax receipts around almost because I think is that is that right. Both the both the power to directly recover from people's bank accounts and the fact that people are going to be. submitting their tax returns more frequently means that you're able to drag money forward into, into the forecast period that would otherwise .
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Julie Minns
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Julie Minns
Lower debt and more recovery of debt. Thank you. Thank you very much. Mr. Dean. Can I thank our witnesses very much indeed for their time? That's the members of the Budget Responsibility Committee chair is, of course, Professor Jonathan Haskell and his the other members, Tom Josephs and Professor David Miles. The transcript of this session will be available on the website uncorrected in the next couple of days. Thank you to our colleagues at Hansard. Thank you to our colleagues at Bow Tie for the broadcasting. And for those of you who are followers of the Treasury Select Committee, our next session is next Wednesday with the Chancellor of the Exchequer, the Right Honourable John Healey MP.
So thanks to our witnesses for providing both the forecast and today's session as we .
So thanks to our witnesses for providing both the forecast and today's session as we .
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