Good morning, convener, and thank you for the invitation. It is a pleasure to be back. I should preface what I say today by warning you that we are now in what is formally the purdah period as a result of the UK general election, which means that I am supposed to be even more opaque and incomprehensible in my answers than I normally would be. If you think that you have understood what I have said, then it is not what I meant to say. [Laughter.]
I will start off by saying a little about the broad highlights of the latest economic and fiscal forecast that we published alongside the UK budget. In doing so, I will compare it with what we published at the end of last year at the time of the autumn statement.
Thinking about what changed between December and March, there were a number of factors that were both positive and negative for the economy. Most dramatically, there was a further sharp fall in the oil price—the spot price fell by about 27 per cent and the medium-term level implied by the first couple of years of the futures curve fell by about 17 per cent between the two forecasts.
We also saw a further substantial rise in net inward migration into the UK—about 298,000 in the year—and that is significantly higher than we had been anticipating for the levels over the next few years. We have now plugged into our forecast an assumption that net inward migration will decline to about 165,000 a year, rather than 105,000 a year. We have to choose from a variety of population projections that are presented by the Office for National Statistics.
We have seen a downward movement in market interest rate expectations. In one way, that can be seen as a positive stimulus; on the other hand, it may be reflecting the fact that people are gloomier about growth prospects. It could be read either way.
We had a series of downward revisions to past gross domestic product growth estimates through 2013 and 2014, which were very slightly reversed in the data that was published yesterday.
We had another disappointing quarter for productivity growth—worker output per hour continued to show weak productivity by historical standards—and we also had a weaker global outlook, judging from the forecasts published by the International Monetary Fund, the Organisation for Economic Co-operation and Development and the like.
We judged that all of those factors taken together would have a relatively modest net effect on our GDP forecast and on the budget deficit. We have edged up our growth forecast slightly in the near term, reflecting the fact that the lower oil price reduces inflation—primarily via lower fuel prices—and temporarily pushes up real incomes, leading us to assume a boost from consumer spending.
Slightly further into the future, growth is nudged down in 2017 because of the assumption that oil production will be weaker throughout the forecast as a result of the lower oil price. Right at the end of the forecast there is a slight upward nudge because of the assumed higher levels of net inward migration. Over the forecast as a whole, there is growth of about 2.5 per cent a year over the five years.
The other main difference in our latest forecast is lower inflation in the near term than we were anticipating before, with inflation near zero and presumably negative in some months on the consumer prices index measure.
I will turn now to the position of the public finances. We have revised down both receipts and spending somewhat over the course of the forecast. On the spending side in particular, the combination of lower market interest rates and lower inflation means that servicing index-linked gilts is less expensive. Welfare bills are also less expensive, because of the presumption that benefit values will not be uprated as quickly as they otherwise would have been.
The impact on the public finances is offset somewhat. On the basis of the overall approach in the Government’s medium-term profile for public spending, which it has changed, the fact is that money saved on debt interest does not necessarily feed through to a lower forecast for Government borrowing but reduces the previously implied squeeze on public services.
There are a number of reasons why we have pulled the estimates for receipts down: the oil receipts, lower interest rates, which will reduce the income the Government gets from its assets, and changes in various tax measures.
The starting point for the impact of the budget policy measures is what might be thought of as the menu with prices in the Treasury’s red book—the list of individual tax and spending measures and their costs. The 2015 budget is another fiscal event pretty much in keeping with every one subsequent to the—quote unquote—emergency budget in 2010, in that the giveaways broadly match the takeaways over the five years and, indeed, in most individual years.
The budget policy measures do not therefore make a great deal of difference to the outlook for borrowing. To summarise, the Government is bringing in some more money from the banks and by reducing the value of pension relief for relatively high earners, and it is spending that money on things such as higher income tax allowance, the subsidy for first-time buyers and measures to help the oil sector.
What has made more difference is that the Government has yet to say what it wants us to assume is its policy on choices over expenditure on public services and capital spending. At the moment, we have detailed plans for public expenditure department by department set out only for 2015-16. That requires us to make an assumption for the remaining four years of the forecast.
We asked the Government what it wants us to assume, and we have been given an assumption that we are assured is the agreed view of the coalition as a whole, although both parties would say that, if they were governing alone, they would be doing some things differently.
The Government has chosen to tell us directly not how much it wants to spend on public services but how much it wants to spend in total. The forecast that we produce for items such as debt interest and welfare can be subtracted from that figure, leaving an implied envelope left over for public services spending.
There have been some significant changes to that envelope. The Government has slightly increased the squeeze on total public spending that it wants us to assume through to 2018-19, but it has dropped the idea of cutting total public spending as a share of GDP in 2019-20, the final year of the forecast.
In consequence, the implied profile for the change in spending on public services over the five years of the next Parliament looks somewhat uneven. We refer to the profile as a rollercoaster in our report. There will be a sharper real cut in public spending on public services in 2016-17 and 2017-18 than anything we have seen over this Parliament, but that is put into reverse in 2019-20.
On rationale, it is obviously for the Government to say why it has chosen those figures, but there are a number of things that can be said about the shape of the public finance forecast as a whole that the Government has achieved—for want of a better word—and the consequences that that has had. It has ensured that our forecasts for borrowing are lower in every year to 2018-19 than they were in December. That has been achieved by tightening the squeeze in the middle. It is no longer the case—as it was in the December forecast—that public spending is set to fall to its lowest share of GDP since the 1930s: the additional cut in spending in the final year has been dropped.
The Government is also still achieving, with some room for manoeuvre, the fiscal targets that it set itself with the rolling three-year target for a particular measure of the budget deficit. That is one reason why the Government has continued to pencil in the particularly sharp squeeze on spending in years 2 and 3 of the next Parliament.
Finally, the Government has also managed to see debt as a share of GDP fall in 2015-16, which is a year earlier than in our December forecast. It has achieved that by announcing additional asset sales: the Northern Rock securitisation vehicle, Granite, and more sales of Lloyds Bank shares. It is important to point out that, if you sell an asset for roughly the present value of the future flow of income that you will get from it, that does not make the public finances better off—you are changing the flow of money that is coming in. It is worth noting that the sales bring in an additional £20 billion to reduce debt in 2015-16 but, in effect, reduce the Government’s income in the remaining years of the forecast by about £10 billion.
On the face of it, we might look at the profile of public services spending and ask why, if we had a blank sheet of paper, we would design it like that. However, we have to bear it in mind that there are various objectives for what the Government wanted the public finances forecast to look like, and that is what drops out as a consequence.
Secondly, it is the agreed policy of the coalition. Both the Conservatives and the Liberal Democrats have said that they would do different things if they were governing alone. For example, the Conservatives have said that they would not need to squeeze public services as much in the middle of the next Parliament, because they would find more money from welfare cuts and measures to tackle tax avoidance. The UK Parliament has instructed us not to look at the alternative policies of different parties, so I merely note that rather than comment on it.