Pre-Budget Report 2006

My Lords, I accept perfectly that Treasury forecasts are as likely to be wrong as right, like anybody else’s economic forecasts. I noted that the Stern report said that making an economic forecast one year ahead is not always easy. He then proceeded to make one 50 years ahead, which I would assume he accepts is even more difficult. I gather the Treasury has denied that statement, but it does not matter. Certainly, Treasury forecasts from time to time are just as likely to be wrong as right, as the noble Lord, Lord Wakeham, and I both know from days in government. We do not need to get too excited about them, although I noted that the committee’s witnesses from the Bank said that of course the decisions were taken on more and much bigger issues than just the Treasury forecasts. As I say, they are not so stupid as to rely solely on those forecasts. I want to raise a point about the Chancellor’s current forecasts on economic growth, not those made in the past. It is forecast to be about 2.75 per cent this year, which most forecasters of all kinds apparently agree is likely. Next year, it will be 2.75 to 3.25 per cent, as my noble friend repeated today. Again, nobody has quite disputed that as yet, and it may well happen. However, the trend growth figure is probably even more important. We are now being told that the trend growth has gone up to 2.75 per cent—previously, it was 2.5 per cent. I confirm, sadly, that the Government and the Chancellor do not expect the 3.25 per cent that they might achieve next year to be sustainable. Indeed, 2008 is already forecast to be slightly lower, and it might be lower still in 2009, although inflation will continue at round about the 2 per cent target figure given to the Monetary Policy Committee. Will the Monetary Policy Committee then allow, if I may put it that way, a 2.75 per cent trend rate if it affects the achievement of the remit about the rate of inflation, being 2 per cent—or, rather, 1 per cent up or down? My impression has always been that the Governor worries more about writing a letter to the Chancellor than about his other remit, which is to considerthe Government’s economic policies. He seems to be frightened to death of sending a letter to the Chancellor to say that we might have gone 1.1 per cent over the 2 per cent target. I do not know why he needs to worry in that way. He is obviously not worrying about what his policies on interest rates do to economic growth, which seems to me to be much more important. The remit could be changed to1.25 per cent above or below the target rate of 2 per cent. I said in a recent debate that I would not worry if inflation was slightly higher, as long as we had higher rates of sustainable growth. I was then accused of supporting high rate of inflation. I would certainly support 0.5 per cent more if that gave us a sustainable higher rate of economic growth. I have said this before, but I worry that the Monetary Policy Committee, the Bank of England and the Governor have clearly taken no account whatever of their remit that, ““subject to that””—in those famous three words—they are supposed to look at what is happening to economic policy. They do not seem to be doing that at all. I hope that the Government and the Chancellor are as concerned about that as I am. I cannot see how we will be able to have a sustainable rate of growth higher than the average—I congratulate the Chancellor; I assume that no congratulations will come from the noble Baroness, Lady Noakes, but the past 10 years have seen an average of 2.5 per cent growth. We have never had that from any Chancellor before; we are entitled to congratulate him on that, and I certainly do. The question is: is it sustainable at that or even a higher rate? Of course, that depends to a considerable degree on improvements in the level of productivity, to which the noble Lord, Lord MacGregor, referred. He gave one or two reasons why productivity may or may not achieve the figures that we have had up to now. In the Pre-Budget Report, the Chancellor told us—again, we are talking of averages, which is a difficult thing to do in any forecast—that average productivity growth was 1.9 per cent before 1997 and, since then, has been 2.4 per cent. I do not know how the statisticians measure productivity rates, but I am as suspicious of them as I am of any other forecast. Even assuming they are right, that increase in productivity did not achieve a higher level of sustainable economic growth, which stayed at 2.5 per cent. I assume that it is accepted in the Treasury that it will not be able to sustain a higher rate of economic growth on average than 2.5 per cent, yet we are told that we have a trend growth rate of 2.75 per cent. Can my noble friend tell us how the 2.75 per cent trend rate was calculated? Under the Monetary Policy Committee’s remit as it sees it—not as I would see it—I wonder whether it would allow a 2.75 per cent rate of growth while it is more concerned with having to write a letter to the Chancellor because we have gone more than 1 per cent above the target rate of inflation. I conclude—I have gone on too long so I had better conclude—by again congratulating my right honourable friend the Chancellor and looking forward to him doing even better as Prime Minister.