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Finance: Fiscal and Monetary Policy

Volume 721: debated on Tuesday 2 November 2010

Question

Asked By

To ask Her Majesty’s Government how the Chancellor of the Exchequer is co-ordinating fiscal and monetary policy.

My Lords, the Monetary Policy Committee of the Bank of England takes into account the path for fiscal policy in judging the outlook for growth and inflation, and hence in its monetary policy decisions. As provided for in the Bank of England Act 1998, a Treasury representative attends, and may speak at, the monthly MPC meetings. The non-voting representative plays a key role in ensuring appropriate co-ordination of fiscal and monetary policy, including by briefing the MPC on the Budget.

I thank the Minister very much for that Answer. Did he notice a recent speech by Dr Posen, a new member of the Monetary Policy Committee who presumably was appointed by the new Government, in which he said that we should not get too excited about the welcoming figures on growth that we saw last week—which of course did not come from the present Government’s responsibilities? I would never seek to accuse the noble Lord of getting overexcited about anything, but perhaps I could refer to a Written Answer he gave me on the question of the non-voting senior Treasury official who attends the Monetary Policy Committee. He said that he,

“plays a key role in liaison between the Treasury and the Bank to ensure appropriate co-ordination of fiscal and monetary policy”.—[Official Report, 27/9/10; col. WA 493.]

It would be interesting to know what the Government mean by “appropriate”. Would that include telling the Bank that the Treasury wanted to see something done to help growth, for example by increasing capital investment, which is desperately needed and would also help considerably with unemployment?

My Lords, first, since the noble Lord, Lord Barnett, draws attention to the fact that we did have a strong third quarter of growth at 0.8 per cent, we should celebrate the fact that we have had a third consecutive quarter of growth. The recovery will no doubt be choppy, and I am sure that at certain points what happens will suddenly become our responsibility, not theirs. That aside, the responsibility of the Treasury official who attends the Monetary Policy Committee is essentially to bring to the attention of committee members matters of which they ought to be aware in coming to their independent conclusions on monetary policy judgments. That includes briefing them, for example, on the judgments that have been made in the Treasury’s Budget so that they can factor them into account in their deliberations.

My Lords, has my noble friend seen the reports today on the mid-term elections in America, which state that President Obama's deficit reduction council is set to recommend that the best way to reduce the deficit is to cut the burden of taxation on the private sector in order to create wealth?

My Lords, in the judgments that my right honourable friend the Chancellor of the Exchequer made about how to achieve the huge and very necessary consolidation of the fiscal position here, by the end of the consolidation period, 77 per cent of the burden will have been taken by expenditure cuts and only 23 per cent by taxation, because it is precisely by not raising taxes and choking off growth that we will get the economy growing again in a balanced way. I am grateful to my noble friend for bringing our attention to that matter.

My Lords, the Minister rightly reminded us of the legislation under which the Monetary Policy Committee operates, which obliges it to hit an inflation target. There is also a “subject to” clause that has troubled all of us for years. Will the Minister interpret for us the Government’s present view of “subject to”? In particular, where do the Government stand on the restoration of full employment as an aim in our economy and as an achievement?

My Lords, the Chancellor writes a very clear mandate letter to the Governor of the Bank of England for the Monetary Policy Committee to hit a target of 2 per cent for the 12-month rise in the CPI. Of course, that is the same target that was set under the previous Government. It is up to the governor and the MPC to interpret the Act in the appropriate way. As far as concerns employment, we must think about the OBR forecast which says that on the Government's policies laid out in the Budget, unemployment will fall and employment will rise in every period considered by the forecast.

Does my noble friend accept that, if we are to see a revival in the economy, it is going to come from the private sector and from low interest rates, and that those interest rates would be very much higher if this Government were not addressing the appalling structural deficit that we inherited from the previous Government?

I completely agree and am grateful to my noble friend for drawing our attention to that. Indeed, only 10 days ago, after the spending review, Standard and Poor’s, one of the leading rating agencies, moved our rating from negative to stable. It is that confidence that keeps interest rates low and enables businesses to invest.

First, I thank the Minister for what I think was the first open acknowledgement, and the clearest indication yet, that the last three quarters’ growth has been down to the previous Government, not this Government. Secondly, going back to his first Answer, how much importance do the Government attach to the growth of the economy? After all, on many occasions over the past 200 years national debt in the United Kingdom has been far higher than it is now, and it has always been primarily growth that has got us out of it. Therefore, should we not put growth at the very top of the agenda and should not the Government start saying that?

My Lords, first, I made no admission. I do not think that we have time today to apportion credit and blame but I merely note that I look forward to seeing when the party opposite decides that something relating to the economy is its fault. As to the size of the debt, as a Government we inherited the largest peacetime deficit in our history—indeed, the largest deficit in Europe—and there are all sorts of measures of this. We have needed to engage in an £81 billion consolidation of the fiscal situation in order to retain, as we have done, the confidence of the market to enable growth policies to be underpinned.