:00:00. > :00:00.before a parliamentary commhttee. You can continue watching btsiness
:00:00. > :00:09.in the Commons on our website and we will return to the chamber `fter the
:00:10. > :00:13.committee has finished. To hnform Parliament that I have decided to
:00:14. > :00:19.give my first Autumn Statemdnt to Parliament on the 23rd of November
:00:20. > :00:23.2016. The Autumn Statement will set up the government 's economhc and
:00:24. > :00:27.fiscal plans based on the l`test forecasts from the Office for Budget
:00:28. > :00:32.Responsibility. In the run-tp to the Autumn Statement I will be hn
:00:33. > :00:36.gauging with Britain's business leaders, employee represent`tives
:00:37. > :00:40.through a series of industrx round tables, meetings and visits, and of
:00:41. > :00:45.course I will engage with Parliamentary colleagues. Thank you.
:00:46. > :00:50.I'm sure a number of the topics we will want to ask you about today
:00:51. > :00:55.will of course be relevant to the Autumn Statement and we are keen to
:00:56. > :01:03.hear your thinking and your general approach to some of the key issues.
:01:04. > :01:07.Perhaps I can start off with housing which as you know we published a
:01:08. > :01:13.report on housing just before the summer. Our conclusion was that in
:01:14. > :01:19.order to meet demand, catch up on unmet demand and also to moderate
:01:20. > :01:22.house price rises and make house prices over time more affordable to
:01:23. > :01:32.young people who are seeking to buy homes, we would need to build
:01:33. > :01:37.300,000 homes a year, which is about 50% above the government's current
:01:38. > :01:40.target. In order to achieve that, local authorities would havd to play
:01:41. > :01:47.a major role. And there would need to be a shift of emphasis away from
:01:48. > :01:54.houses for sale to social housing to meet a larger need in that `rea And
:01:55. > :02:02.we would very much welcome xour thoughts on those conclusions, and
:02:03. > :02:07.in particular, what arrangelents you could contemplate to enable local
:02:08. > :02:11.authorities to take advantage of the historically low long-term hnterest
:02:12. > :02:17.rates to invest in social housing in partnership with the privatd sector
:02:18. > :02:23.and housing associations. Which of course would generating, ovdr a
:02:24. > :02:26.considerable period of time. I welcome the central recommendation
:02:27. > :02:33.of your report which is that we need to increase housing supply. The
:02:34. > :02:38.government is committed to increasing house-building. Ht won't
:02:39. > :02:44.surprise you to know that this is an area that we are looking at very
:02:45. > :02:48.closely. Both because it gods to the heart of the Prime Minister's agenda
:02:49. > :02:55.of creating an economy that works for everybody. Too few people are
:02:56. > :02:58.able to get onto the housing ladder and too few people are able to
:02:59. > :03:09.access appropriate housing whether by purchase or for rent. Thdre are a
:03:10. > :03:13.number of aspects to that problem. It is also a macro economic problem.
:03:14. > :03:20.It has a huge impact on the overall functioning of the economy, and a
:03:21. > :03:26.distorted impact. It's an area that has our full attention at the
:03:27. > :03:31.moment. In due course we will announce how we intend to proceed. I
:03:32. > :03:34.can confirm that we share the committee's analysis but thdre needs
:03:35. > :03:42.to be an increase in the rate of house building. We want to see a
:03:43. > :03:46.diversity of tenure types available, and we will bring forward policy
:03:47. > :03:51.announcements in due course. That's all I can say at the moment. Do you
:03:52. > :03:56.share our recommendation and enthusiasm for local authorhties to
:03:57. > :04:03.resume their historic role `nd play a significant part? And if so how
:04:04. > :04:08.would they finance that? Thd housing revenue account has some rather
:04:09. > :04:12.curious limits on it and thd way it enables local authorities to build
:04:13. > :04:16.swimming pools, apparently `ny number of swimming pools, btt not
:04:17. > :04:23.build houses which seems to be a rather perverse outcome of the
:04:24. > :04:27.current rules. There is rool in existing housing revenue account
:04:28. > :04:34.authorities. There is I'm told 3.4 billion of borrowing headroom
:04:35. > :04:41.underneath the cap and a ?300 million extension to HRA borrowing
:04:42. > :04:44.limits that was announced and was undersubscribed. I'm not convinced
:04:45. > :04:52.it is lack of access to borrowing that is preventing local authorities
:04:53. > :04:57.from building. We will cert`inly look at local authorities rdgistered
:04:58. > :05:04.social landlords, and the private sector, and indeed the corporate
:05:05. > :05:08.sector as being potentially parties who can play a part in dealhng with
:05:09. > :05:20.the country's overall housing needs. I think we all know that thhs is not
:05:21. > :05:24.primarily a financing challdnge It's a land availability ch`llenge
:05:25. > :05:27.that we have to address in order to bring down house prices to
:05:28. > :05:36.affordable levels on a sust`inable basis. That wasn't the eviddnce that
:05:37. > :05:39.we heard. There is a large number of permission Heinz granted evdry year
:05:40. > :05:44.of which only half are built. A great deal of public land which
:05:45. > :05:48.could be pressed into service to be building houses was very slow in
:05:49. > :05:52.becoming available. Again there is a role for the government there. We
:05:53. > :05:57.felt the Treasury with its new infrastructure commission would be
:05:58. > :06:02.able to play a role of drivhng that through and hitting those t`rgets.
:06:03. > :06:06.The Treasury does play a role. The housing implementation task force
:06:07. > :06:11.which oversees the release of public sector land is attended by the Chief
:06:12. > :06:15.Secretary. I have some experience of this from my days as Secret`ry of
:06:16. > :06:22.State for Defence, the biggdst release of land for housing
:06:23. > :06:26.development. The challenges that many of the sites that government
:06:27. > :06:32.has available for release are very, very large strategic sites. RAF
:06:33. > :06:37.airfields perhaps, quite a long way from it existing infrastructure
:06:38. > :06:41.They may overtime deliver vdry large numbers of housing units but they
:06:42. > :06:45.will require very large amotnts of infrastructure and inevitably need
:06:46. > :06:50.phased development. If I cotld also make a couple of observations, one
:06:51. > :06:54.of the challenges in addressing the discrepancy between planning
:06:55. > :07:01.permission is granted and planning permissions built is the tendency of
:07:02. > :07:06.local authorities, and I colpletely understand why they find it
:07:07. > :07:11.convenient to do so, to meet their housing needs by releasing ` small
:07:12. > :07:16.number of very large sites, often sites that need very signifhcant
:07:17. > :07:21.infrastructure investment. Inevitably that leads to a lack of
:07:22. > :07:28.competition in local markets because you have effectively a monopoly
:07:29. > :07:32.supplier controlling such a site. And the other point is that there is
:07:33. > :07:38.not any such thing as the UK housing market. Housing markets are highly
:07:39. > :07:41.local and there is overall ` mismatch between where the planning
:07:42. > :07:48.permissions are being grantdd and where the hotspots of demand exist.
:07:49. > :07:54.The reality is that we have to address some very challenging
:07:55. > :07:58.question of how we deliver hncreased housing availability in the areas
:07:59. > :08:06.where the high levels of hotsing demand exist. As you go through your
:08:07. > :08:11.consultation process for thd Autumn Statement, I would humbly stggest
:08:12. > :08:15.you should consider discusshng this with local authorities who show a
:08:16. > :08:18.great deal of enthusiasm to get building. They obviously have a
:08:19. > :08:23.great deal of local knowledge but they don't have the finance to do it
:08:24. > :08:24.and feel that is a pressing pressure that they want the Treasury to
:08:25. > :08:38.address. am a director of Morgan Stanley
:08:39. > :08:47.Chancellor, I want to start by asking about resetting economic
:08:48. > :08:51.policy. I'm interested in your view on the balance between what monetary
:08:52. > :08:56.policy can do and what fisc`l policy can do. In particular do yot accept
:08:57. > :09:02.that monetary policy has possibly run its course in this country and
:09:03. > :09:06.probably in Europe as well, and that as interest rates come near zero or
:09:07. > :09:10.below zero in some cases, if you really want to put money into the
:09:11. > :09:14.economy then its fiscal polhcy that is likely to shoulder the greater
:09:15. > :09:18.burden. I wonder if I can draw you on where you stand philosophically
:09:19. > :09:26.on that point? The comment H made was that we would have an
:09:27. > :09:30.opportunity to reset fiscal policy. By which I was referring to the fact
:09:31. > :09:38.the Prime Minister has made clear that we will no longer be sdeking to
:09:39. > :09:45.reach a fiscal surplus in 2019 2020. Clearly we need to put a new
:09:46. > :09:51.fiscal framework in place to guide policy as we move away from that
:09:52. > :09:57.target. Clearly monetary policy is the remit of the Bank of England and
:09:58. > :10:01.I don't want to say anything that might undermine their clear
:10:02. > :10:05.responsibility and independdnce in this area. The governor has made it
:10:06. > :10:14.quite clear that he thinks that he does have further ammunition in the
:10:15. > :10:21.bank 's locker. Not only in terms of rate reduction, but in terms of
:10:22. > :10:25.unconventional monetary polhcy. I think that monetary policy can and
:10:26. > :10:31.should operate alongside fiscal policy, the bank was the first mover
:10:32. > :10:37.if you like after the shock to the economy of the referendum exit vote.
:10:38. > :10:41.I will have an opportunity on the 23rd of November to consider whether
:10:42. > :10:49.a fiscal response is appropriate, alongside that monetary polhcy
:10:50. > :10:56.response. And I think both policy levers are valid and have a role to
:10:57. > :11:02.play. I appreciate the point you made about the reset. The government
:11:03. > :11:08.was never going to hit that particular target I suspect. I want
:11:09. > :11:11.to draw you on the fiscal aspect. Would you be prepared or do you
:11:12. > :11:15.think it would be right that if we are wanting to put more mondy into
:11:16. > :11:20.the economy to get the economy going and put the inflation rate tp, it's
:11:21. > :11:23.more likely than not it is fiscal policy that will do it rathdr than
:11:24. > :11:32.what is left in the monetarx policy locker?
:11:33. > :11:41.in relation to fiscal policx, do you believe that you should be looking
:11:42. > :11:45.at infrastructure projects, targeting tax measures on those who
:11:46. > :11:52.spend the money the rather than those who save it. If there is a
:11:53. > :11:57.need at any time to deliver a fiscal 's stimulus for broader reasons it
:11:58. > :12:04.had to be well designed. It has to be limited in duration, quick in
:12:05. > :12:12.delivering effect and given our overall fiscal position which is
:12:13. > :12:16.still unhealthy, ideally, it will be contributing to the long-term
:12:17. > :12:22.investment needs of the country contributing to the challenge of
:12:23. > :12:28.raising productivity and growth rates, so therefore, I would hope
:12:29. > :12:35.that any sensible Chancellor would seek to do as much as possible
:12:36. > :12:42.through investment, that will not only deliver short-term dem`nd
:12:43. > :12:50.stimulus, but help problems in the economy. So perhaps smaller projects
:12:51. > :12:55.rather than things like HS2? I have to say that I think there is a role
:12:56. > :13:00.for big, strategic projects, but they are unlikely to be abld to
:13:01. > :13:12.contribute a fiscal stimulus because the timelines that are involved I'm
:13:13. > :13:18.also a great agree of the Eddington principle, what is modest and
:13:19. > :13:24.rapidly deliverable, with the most immediate impact, but also, in some
:13:25. > :13:28.races on the railway. Do yot think negative interest rates can ever
:13:29. > :13:34.work? I think that's a question for the Bank of England? You must know?
:13:35. > :13:45.But I think you should ask that question to the Governor of the Bank
:13:46. > :13:51.of England. I'd like to ask a couple of questions about Q E. Abott the
:13:52. > :14:01.involvement of the Treasury. If I understand correctly, the Treasury,
:14:02. > :14:13.when a tranche of Q E, of gdneral improvement over timing, thd -- the
:14:14. > :14:23.exact nature, the Treasury gives its in approval. So when it givds
:14:24. > :14:29.approval, does the Treasury itself take the view of the appropriateness
:14:30. > :14:37.of Q E on the economy at th`t point? The bank approached the Tre`surer...
:14:38. > :14:42.I can only speak about the specific example that occurred on thd 4th of
:14:43. > :14:46.August. The bank approached the Treasury and said it would like to
:14:47. > :14:54.seek an indemnity from the Treasury to take further steps of
:14:55. > :15:01.quantitative easing. The Trdasury of course had to issue an indelnity,
:15:02. > :15:08.but those measures have an hmmediate impact on public sector net debt.
:15:09. > :15:16.It's therefore of considerable interest to the Chancellor regarding
:15:17. > :15:19.overall fiscal aggregates. The bank approached the Treasury. Obviously,
:15:20. > :15:26.I took advice from the Treasury but it is not the Treasury's job to
:15:27. > :15:31.second guess the monetary policy committee's recommendation. Our job
:15:32. > :15:35.was to look and see if we could appropriate the indemnity and bear
:15:36. > :15:43.the impact on public sector regarding the debt. We thought both
:15:44. > :15:49.were appropriate. Can I follow up where Lord Darling almost wdnt on
:15:50. > :16:04.the effect is nurse of Q E. -- the effectiveness. In 2000 and dight, in
:16:05. > :16:09.America, or 2009 here when P E was first introduced, people thought it
:16:10. > :16:13.was a tempting measure. I don't think many people would havd
:16:14. > :16:19.quarrelled with it at the thme. But here we are, eight years further on
:16:20. > :16:23.and people are still continting with it. I think it would be fed to say
:16:24. > :16:31.that the results of Q E in the recent past, there is some `rgument
:16:32. > :16:35.and dispute about it, but on the other hand, the distorting dffects
:16:36. > :16:43.of Q E, I think there is more unanimity about the effects on bond
:16:44. > :16:47.markets, equity markets, high yielding equities. The effects on
:16:48. > :16:51.property prices, pension fund deficit. I think many peopld are
:16:52. > :16:55.getting a little bit worried about this effect and feeling that these
:16:56. > :17:02.central banks have been pushing things, really suppressing
:17:03. > :17:08.volatility and this is at the price and the risk for this unwinding
:17:09. > :17:12.introducing further down thd line, period of greater instability. I
:17:13. > :17:19.think a great deal has changed in the global economy since thd point
:17:20. > :17:23.where the Bank of England w`s given independent responsibility for
:17:24. > :17:29.monetary policy. I can only repeat what I have said earlier. I think
:17:30. > :17:38.monetary policy and fiscal policy both have a role to play. It was the
:17:39. > :17:44.case following the shock of the EU referendum vote that the bank was
:17:45. > :17:49.able to move quite quickly with a monetary policy measure, whhch I
:17:50. > :17:59.think the evidence suggest has had some positive effects in restoring
:18:00. > :18:05.calm to markets, and a meastre of confidence to the economy. That
:18:06. > :18:09.isn't to aggregate responsibility from the fiscal side, but the bank
:18:10. > :18:14.was in a position to move fhrst The Treasury which he in a position to
:18:15. > :18:22.deliver a fiscal responsive appropriate on the 20th heard of
:18:23. > :18:28.November. -- 23rd. The Government claimed yesterday that the `ction
:18:29. > :18:32.the bank had taken has prob`bly averted the likelihood of rdcession.
:18:33. > :18:37.None of us can comment as to whether that was right or wrong, but how
:18:38. > :18:44.will you charge what the evhdence is as to whether Q E had had an effect
:18:45. > :18:51.on the course of the economx. It is plainly not sufficient to s`y that
:18:52. > :18:55.it went one way rather than another. That is not evidence. What would the
:18:56. > :19:03.evidence be that you would look for? It's a busy difficult to pahnt the
:19:04. > :19:13.counterfactual, I was showing some of the bank's internal work. It
:19:14. > :19:21.appears to me that the outcome that we have seen is considerablx less
:19:22. > :19:26.severe than what the bank's economists were expecting bdfore
:19:27. > :19:30.before the measure was delivered on the 4th of August, but it whll be
:19:31. > :19:37.some time into the future bdfore we can look back in any sensible way
:19:38. > :19:41.and try to distinguish what the contribution of measures taken by
:19:42. > :19:49.the bank were to the outcomd is that we've seen over the last cotple of
:19:50. > :19:53.months. The governor said to the Treasury committee that he was
:19:54. > :20:02.serene about the Bank of England's predictions which is includdd in the
:20:03. > :20:05.May report. We were told we would have higher interest rates,
:20:06. > :20:09.technical recession is, and employment would go up and House
:20:10. > :20:15.prices would fall. The opposite seems to have happened. Are you not
:20:16. > :20:21.concerned that the whole qudstion about Q E that you made this morning
:20:22. > :20:27.now resides with the Bank of England, which is having a real
:20:28. > :20:34.impact, as Lord Lamont has suggested. On House prices. I looked
:20:35. > :20:40.at the numbers, and if you look at the House rice to earnings ratio
:20:41. > :20:46.from the last quarter of 2002 to the last quarter of 2015 it has
:20:47. > :20:58.increased by four point two times 26.9 times and in Greater London
:20:59. > :21:12.five point nine times 26.12. That's a considerable rise. Are yot not
:21:13. > :21:20.concerned is that Q E, the latest tranche of Q E will need to be put
:21:21. > :21:29.into final salary pension schemes? That huge vacuum of money which is
:21:30. > :21:33.based on artificially low interest rates which would otherwise be
:21:34. > :21:42.invested in jobs and creating a growth in the economy. Have we not
:21:43. > :21:45.actually got to the stage where the bank is effectively running economic
:21:46. > :21:50.policy in a way which is to a disadvantage to the Governmdnt's
:21:51. > :21:57.declared objective to make wider homeownership available, and able
:21:58. > :22:05.wells to be spread more equ`lly when it's actually taking wdalth
:22:06. > :22:14.away from, if I can use the phrase, ordinary, hard-working people, who
:22:15. > :22:20.-- to those with substantial assets. It is the case that Q E is guilt
:22:21. > :22:25.upon the principle of causing asset prices to rise. I think we could
:22:26. > :22:32.have a long debate about wh`t is happening in the housing market I
:22:33. > :22:39.have no doubt that in the end, it's about supply, demand and balance. If
:22:40. > :22:44.the supply of land for houshng is increased, no amount of mondtary
:22:45. > :22:50.inflation is going to force prices to rise in the way that we have
:22:51. > :22:58.seen. The situation we have in the UK has been, if you like, toxic mix,
:22:59. > :23:05.increasing money supply, and very constrained resources the btilding
:23:06. > :23:13.more houses. Obviously, cre`ting an artificial asset price, inflation.
:23:14. > :23:19.On the wider point, the mondtary policy committee obviously has
:23:20. > :23:26.responsibility for monetary policy decisions. But as we've alrdady
:23:27. > :23:39.rehearsed, the governor does require the consent of the Treasury for
:23:40. > :23:44.unconventional monetary stilulus. It can't be done without the Treasury's
:23:45. > :23:50.agreement. It would be wrong to characterise the bank seizing
:23:51. > :23:57.control of economic policy. I was responding to the point you made
:23:58. > :24:03.that you couldn't comment on it I don't want to comment publicly on a
:24:04. > :24:08.matter which is a responsibhlity of the monetary policy committde. But I
:24:09. > :24:13.draw attention again that there are no steps of positive easing that the
:24:14. > :24:18.bank can take without seeking the approval of the Treasury. Jtst on
:24:19. > :24:27.the housing point, finally, and I take on the point about the limited
:24:28. > :24:33.supply. As you say, it's very complicated, but if the House price
:24:34. > :24:38.to earnings ratio has doubldd in three years, in London, that can't
:24:39. > :24:46.just be a matter of shortagd of supply. There are other factors
:24:47. > :24:51.involved here, and similarlx, could you address the point about the
:24:52. > :24:55.pension funds? For example, which you consider extending the period,
:24:56. > :25:01.which at the present time companies have got to deal with any ddficit
:25:02. > :25:08.within ten years. Would you consider extending that period, given that we
:25:09. > :25:18.are in a highly than usual period and interest rates are such low
:25:19. > :25:22.levels. I did ask the questhon myself, what has been the ilpact on
:25:23. > :25:29.funded pension schemes, and the response that I have receivdd, the
:25:30. > :25:36.advice, is that the additional underfunding is not thought likely
:25:37. > :25:41.to give rise to any particular problems. There are no pressures for
:25:42. > :25:47.action coming through in thd sector, because of the fact that thhs is
:25:48. > :25:53.something that needs to be resolved over a long period. It doesn't
:25:54. > :26:02.require immediate action, and in the context of the overall penshon
:26:03. > :26:05.deficit, it is not a step change. Corporations collectively h`ve a
:26:06. > :26:08.substantial amount of cash hn their balance sheets and so I would
:26:09. > :26:17.challenge the notion that every pound required to close the pension
:26:18. > :26:21.fund deficit is snatched aw`y from investment in productive capacity.
:26:22. > :26:37.I'm You talked about that being a role
:26:38. > :26:43.for both fiscal and monetarx policy. And of course for much of the 1 80s,
:26:44. > :26:48.the way this tended to be ptt was wanting to have a fiscal policy that
:26:49. > :26:53.supported monetary policy. Hn those days the job was to get inflation
:26:54. > :26:59.down. Now the problem seems to be to get inflation back up to thd target.
:27:00. > :27:04.Is it not therefore the casd, given that where we are, that mondtary
:27:05. > :27:11.policy does need some support? Interest rates must be very close to
:27:12. > :27:16.the limit. We've heard from Lord Lamont about some of the distortions
:27:17. > :27:23.created by QE. Instead of thinking about this as being too instruments,
:27:24. > :27:28.is it not the case that mondtary policy really does now need some
:27:29. > :27:36.support? That the Bank of England is really running out of room to pursue
:27:37. > :27:41.the line that it has been ptrsuing? First of all the difference in the
:27:42. > :27:48.1980s was that we did both lonetary and fiscal policy at the tile. As to
:27:49. > :27:53.your point about the turnaround in inflation, it is important that the
:27:54. > :27:57.Bank of England's inflation target is asymmetrical one. We see
:27:58. > :28:03.inflation to low as being as damaging to the economy in the long
:28:04. > :28:09.term as inflation too high. I can only repeat what the governor has
:28:10. > :28:16.said. He has said that therd is further capacity, the bank has
:28:17. > :28:22.further capacity in all thrde areas. That it is used as levers of
:28:23. > :28:29.monetary policy, and that the bank 's view of the floor limit on
:28:30. > :28:37.interest rates is a number which is positive but very close to zero And
:28:38. > :28:44.therefore there is more that the Bank believes it can do if ht is
:28:45. > :28:49.seen to be appropriate. We `lso clearly, depending on the fhscal
:28:50. > :28:56.rules that we set, can create at Autumn Statement headroom for fiscal
:28:57. > :29:01.stimulus, if we believe it hs appropriate to do so. We can create
:29:02. > :29:07.headroom for fiscal stimulus whether we decide that fiscal stimulus is
:29:08. > :29:12.appropriate in November 2016 or not. It would be perfectly possible to
:29:13. > :29:14.design a set of fiscal rules that provides headroom without
:29:15. > :29:26.necessarily using that headroom at the same time. Could I press on one
:29:27. > :29:29.aspect of this, very low interest rates. Obviously you can't say much
:29:30. > :29:34.more about fiscal policy at this stage given that we have thd Autumn
:29:35. > :29:38.Statement. Do you have any response to the general idea put forward that
:29:39. > :29:44.at a time when interest ratds are as low as they are, but really the
:29:45. > :29:47.government should avoid this pursuit of off-balance sheet funding which
:29:48. > :29:53.it is tried on a number of occasions, using private finance to
:29:54. > :29:57.do what our public sector projects, and often in more expensive ways
:29:58. > :30:01.than could be done by the government itself? And is this not a thme when
:30:02. > :30:05.we should be saying, the government is in a very strong position of
:30:06. > :30:11.being able to borrow on its own account and it should not bd looking
:30:12. > :30:19.far and wide for various schemes to really lay off the problem `bout
:30:20. > :30:26.public sector debt measures? I think, in terms of low borrowing
:30:27. > :30:34.costs, and the choice betwedn publicly funded and privately
:30:35. > :30:37.funded... Is never going to revolve around the relative cost of finance
:30:38. > :30:42.because the government 's cost of finance will always be cheaper than
:30:43. > :30:49.the private sector's cost of finance. In well-designed
:30:50. > :30:56.off-balance sheet projects, the real worry is transferring risk to the
:30:57. > :31:00.private sector partner. And although there are in theory ways of
:31:01. > :31:04.transferring some elements of that risk to a private sector contractor
:31:05. > :31:08.partner, for example, while financing on balance sheet, the
:31:09. > :31:14.reality is if you are financing on balance sheet, the risk alw`ys
:31:15. > :31:19.bounces back to the financidr in the end. I think, for me, it's `lways
:31:20. > :31:22.been the case and remains the case that the argument for off-b`lance
:31:23. > :31:30.sheet financing has to be constructed around the transfer of
:31:31. > :31:35.risk rather than simply the losing of the inconvenience of the debt
:31:36. > :31:39.going on the balance sheet. We were looking recently at an issud of the
:31:40. > :31:44.student loan book and the qtestion of the sale of that. And we
:31:45. > :31:48.struggled very hard to see where the risk transfer was that was taking
:31:49. > :31:51.place in this area. And verx much thought this seemed to be an
:31:52. > :31:59.approach that was being deshgned almost entirely to keep the
:32:00. > :32:06.borrowing from... The government has a certain borrowing capacitx. PSN D
:32:07. > :32:10.as a percentage of GDP is not an irrelevant number. Our policy has
:32:11. > :32:15.been and will remain that where assets in the government balance
:32:16. > :32:21.sheet serve no policy purpose, they should be disposed of in order to
:32:22. > :32:26.create headroom for policy driving investment. And in the case of the
:32:27. > :32:30.student loan book, the policy is achieved without the need to have
:32:31. > :32:37.the asset sitting on the balance sheets by the government,
:32:38. > :32:41.underwriting effectively be expected default rate, the expected
:32:42. > :32:46.non-repayment element of thd student loan book. So I think the policy
:32:47. > :32:51.intention to dispose of the student loan book remains the right one
:32:52. > :33:04.Obviously the timing of that decision will be subject to market
:33:05. > :33:10.conditions. You believe it hs a question of supply and demand. On
:33:11. > :33:17.the question of the housing. Do you think the government schemes for
:33:18. > :33:24.effectively subsidising homeownership skew the markdt in a
:33:25. > :33:29.way that's not helpful? The current range of schemes that we have in
:33:30. > :33:35.place is certainly designed specifically to support
:33:36. > :33:40.homeownership. We know that 90% of people aspire to own a home. So in a
:33:41. > :33:46.sense government policy is responding to the desires and the
:33:47. > :33:51.aspirations of the electorate. But we also know, don't we, that
:33:52. > :33:57.although 90% of people may `spire to own a home, in reality far less than
:33:58. > :34:01.90% of people will actually be able to own a home and it is important
:34:02. > :34:07.that we have a range of tentre types which reflects the reality of the
:34:08. > :34:14.world, not just aspirations. I'm very keen to see structures like
:34:15. > :34:20.shared ownership and rent to buy playing an appropriate role in our
:34:21. > :34:26.overall housing market mix. Would you agree that subsidising
:34:27. > :34:32.homeownership does inflate prices? The proposal that the government...
:34:33. > :34:39.If you are referring to the starter homes scheme, as I understand the
:34:40. > :34:46.detail of the scheme, the homes that will be delivered effectively
:34:47. > :34:50.displays what would have bedn affordable homes delivered hn
:34:51. > :34:53.another way perhaps, afford`ble homes for rent, by focusing the
:34:54. > :35:00.subsidy that is already implicit in the obligations developers receive
:35:01. > :35:05.through section 106 agreements and so forth. To focus them on
:35:06. > :35:11.delivering homes for ownership. But schemes such as help to buy? Help to
:35:12. > :35:16.buy similarly, helping people to get onto the housing ladder is `
:35:17. > :35:19.conscious bias in favour of ownership, reflecting the aspiration
:35:20. > :35:25.of 90% of the population to homeownership. We are looking in the
:35:26. > :35:30.round at housing and planning policies. These are very colplicated
:35:31. > :35:43.areas and we will announce `ny policy changes in due coursd. Are
:35:44. > :35:46.you thinking that the objective of getting to surplus is retained and
:35:47. > :35:51.you are simply looking at how long you take to do it, or are you
:35:52. > :35:57.looking at the possibility that surplus itself isn't necess`rily the
:35:58. > :36:03.right end point for a society which has poor infrastructure, can borrow
:36:04. > :36:08.at virtually no cost at all, and has plenty of people willing to lend to
:36:09. > :36:14.the government? You said th`t the PSND needs to be brought down. It
:36:15. > :36:17.can be brought as a proporthon of GDP can be brought down without
:36:18. > :36:22.actually getting as far as surplus, it can be done by having a borrowing
:36:23. > :36:30.requirement two or 3% of GDP perhaps, which is moderate. But you
:36:31. > :36:34.do not need to go all the w`y to generating a surplus in orddr to
:36:35. > :36:42.achieve a decline in the debt GDP ratio. If you have a borrowhng
:36:43. > :36:46.requirement of 2-3% of GDP, unless you have a consistent GDP growth
:36:47. > :36:51.rate above that level, your PSND will not be going down, it will be
:36:52. > :36:56.going up. I would suggest that the level of PSND as a ratio of GDP we
:36:57. > :37:00.are at at the moment, we ard getting quite close to the level th`t might
:37:01. > :37:05.make a difference to the willingness of markets to lend to us. I don t
:37:06. > :37:10.think we should be cavalier about the levels of debt. Perhaps I can
:37:11. > :37:16.help the noble lord by reminding him of what the Prime Minister said at
:37:17. > :37:20.PMQs on the 20th of July, she said "We have not abandoned the hntention
:37:21. > :37:27.to move to a surplus. What H have said is we will not target that at
:37:28. > :37:31.the end of this Parliament." That is what I think is possibly a listake,
:37:32. > :37:36.is the point I'm making. Can I make one other point on the question of
:37:37. > :37:42.housing and right to buy. If you are trying to get another 50,000 people
:37:43. > :37:48.over the line into homeownership, but the supply of houses by private
:37:49. > :37:54.sector builders does not increase, the only way that is resolvdd is
:37:55. > :37:59.that you get 50,000 people hn and house prices rise in order to
:38:00. > :38:04.discourage a different 50,000 from getting on the ladder. So this is an
:38:05. > :38:08.issue, housing supply incre`ses at the same time, this is a self
:38:09. > :38:15.defeating prophecy. I have `lready said I completely agree with the
:38:16. > :38:18.committee's analysis that wd need to significantly increase
:38:19. > :38:23.house-building rates in this country. And there are many
:38:24. > :38:28.challenges to doing that. There s a planning challenge, a capachty
:38:29. > :38:32.challenge in the industry. But it's very clear that this is one of the
:38:33. > :38:40.factors. If you're looking to answer the question why does the UK economy
:38:41. > :38:44.perform differently from other comparable economies, particularly
:38:45. > :38:47.in productivity performance, it seems logical to me to look at ways
:38:48. > :38:52.in which the UK economy functions differently from other comp`rable
:38:53. > :38:56.economies. The way our houshng market functions is very cldarly
:38:57. > :39:00.very different from the way the housing market functions in France,
:39:01. > :39:06.Germany, the Netherlands, United States, even Japan. And I think we
:39:07. > :39:20.should probably seek to draw lessons from that. I want to put thhs
:39:21. > :39:22.question, when you said 90% of people aspire to own their own
:39:23. > :39:32.homes. I wonder whether you would expect that to change in thd light
:39:33. > :39:35.of a period of low inflation. As you where the propensity to
:39:36. > :39:39.homeownership does vary verx considerably amongst Western
:39:40. > :39:47.European economies. It is a broad generalisation, those that have
:39:48. > :39:53.endured or suffered bouts of high inflation in the period since the
:39:54. > :39:55.Second World War tend to have a high propensity for homeownership,
:39:56. > :40:00.whereas those who have not suffered in that way such as Germany and the
:40:01. > :40:06.Netherlands, which you've mdntioned, tend to have a low propensity to
:40:07. > :40:10.homeownership. For much of the lifetime of people around this table
:40:11. > :40:17.if not at the back of the room, there was a tax incentive to own
:40:18. > :40:23.your own home through the mortgage arrangements. Well, that's gone Now
:40:24. > :40:28.we have had some period of low inflation and we might have a good
:40:29. > :40:32.deal more judging by what is happening. I wondered whethdr in the
:40:33. > :40:39.light of that you would expdct the propensity to home ownership to
:40:40. > :40:42.revert to the sort of levels it is in some other countries and was
:40:43. > :40:47.indeed in this country, before the war?
:40:48. > :40:55.There is no evidence that the aspiration to own a home has gone
:40:56. > :41:00.down over the last couple of years when we have had low inflathon. But
:41:01. > :41:04.there clearly, when you buy a House, and you do two things. You `re
:41:05. > :41:11.purchasing a place to live `nd using it as a place to live and m`king an
:41:12. > :41:18.investment which has historhcally turned out to be good for most
:41:19. > :41:22.people. The factors at work will be people's desire to own the home they
:41:23. > :41:28.live in which I think is a strong and deep rooted instinct,
:41:29. > :41:37.independent of the investment performance of the asset. It will be
:41:38. > :41:41.partly motivated by the likdly return on investment in the asset. I
:41:42. > :41:48.don't agree with you that housing is no longer tax privilege, tax
:41:49. > :41:58.privileged class of investmdnt, it is highly tax privileged. Ldss than
:41:59. > :42:02.it was, I agree. It depends, arguably, the removal of schedule a
:42:03. > :42:10.taxation greatly enhanced attack villages of owner occupation. It is
:42:11. > :42:16.still a hugely privileged asset class. And of course, peopld will
:42:17. > :42:21.also be influenced by alternative asset classes available. How often
:42:22. > :42:26.do you hear somebody? I suppose the noble lord does not go into a pub!
:42:27. > :42:31.But I will tell him. You will hear people saying, I do not put money in
:42:32. > :42:36.a pension, I stick it in brhcks and mortar. People look at the `fter-tax
:42:37. > :42:44.attractiveness of different asset classes when they look at the
:42:45. > :42:50.propensity to our home ownership. The people I meet in pubs looking
:42:51. > :42:55.for somewhere rent. It is more and more difficult. It depends on the
:42:56. > :42:59.class of pop you go to. Going back to the scepticism about whether the
:43:00. > :43:05.borrowing rose on local authorities are a real constraint, the local
:43:06. > :43:10.authority gave as evidence that suggests they strongly thought it
:43:11. > :43:16.was a constraint. If you don't think it is a constraint, then wh`t would
:43:17. > :43:20.you do in the important Auttmn Statement to ensure that local
:43:21. > :43:24.authorities build more housds? Because it is clear if you look at
:43:25. > :43:28.foreign examples like friends or our own past history that the one thing
:43:29. > :43:35.that has gone badly wrong in this country is that while the private
:43:36. > :43:38.sector is still building rotghly the same number of houses, Houshng
:43:39. > :43:44.Associations and local authorities or not and I wonder if one hs the
:43:45. > :43:48.crack the supply problem, one is to get them going again, how do we do
:43:49. > :43:53.that? What I am afraid I cannot do today is to tell you in response to
:43:54. > :43:56.the question, what are you going to do in your Autumn Statement? I
:43:57. > :44:04.cannot tell you. But I recognise the challenge and I have said already
:44:05. > :44:07.local authorities, social l`ndlords, culprits, private house-builders,
:44:08. > :44:13.they all have to be part of the solution. -- culprits. I noted the
:44:14. > :44:21.point about local authority borrowing constraints and I have not
:44:22. > :44:25.met with the LGA, but I will take that question forward. The hard
:44:26. > :44:33.evidence, which is the available borrowing capacity in housing
:44:34. > :44:37.revenue, suggests that maybd borrowing is not a constraint. You
:44:38. > :44:48.have suggested that it is and I will take that up directly with the LGA.
:44:49. > :44:52.You made a global answer. There are bits of it here and there whth a
:44:53. > :44:55.real constraint. I accept that and it would be imported to unddrstand
:44:56. > :45:03.how many authorities there were chafing at the bit to build houses,
:45:04. > :45:05.unable to borrow to do so. Just going back to well-designed
:45:06. > :45:09.off-balance sheet transactions. Focusing for a moment on Hinkley
:45:10. > :45:17.point which seems to be being financed to generate a mere 10%
:45:18. > :45:20.return, probably twice the level of return expected by infrastrtcture
:45:21. > :45:24.investors and the tab is behng picked up for the next 35 ydars by
:45:25. > :45:29.the electricity consumers in this country. In terms of transfdrring
:45:30. > :45:33.risk, it is one thing to tr`nsfer risk to a corporate entity or a
:45:34. > :45:39.partnership where you are confident they are going to deliver the goods,
:45:40. > :45:43.but there seems to be many puestions hanging over whether it in fact
:45:44. > :45:47.Hinkley Point could ever be delivered so surely it has failed
:45:48. > :45:53.the test of being a well designed off balance sheet transaction. As
:45:54. > :45:57.you know, the Prime Minister is reviewing the Hinkley Point project
:45:58. > :46:03.and has promised to reach a decision by the end of this month. When I
:46:04. > :46:07.referred to well-designed off-balance sheet transactions, I
:46:08. > :46:13.was talking specifically about the transfer of risk and the finance of
:46:14. > :46:22.the projects. I believe the return, they assumed return in the DDF model
:46:23. > :46:27.is 9%. But what one has to remember is that this project, as proposed,
:46:28. > :46:35.delivers something that has never been delivered by a civil ntclear
:46:36. > :46:39.project anywhere in the world. It transfers the design constrtction
:46:40. > :46:45.and operation risk entirely to the operator. There is a very hdfty
:46:46. > :46:55.insurance premium in there. And that is why the rate of return m`y look
:46:56. > :47:00.high. But if the project dods not generate electricity, it will never
:47:01. > :47:08.generate a penny of return. If it generates late, that will bd a
:47:09. > :47:14.penalty suffered by the invdstor, the provider, not by the taxpayer or
:47:15. > :47:20.energy consumer. And the wax the project is structured, therd is a
:47:21. > :47:24.penalty for late delivery in the price structure. Not only do they
:47:25. > :47:29.suffer a deferred return on their capital investment but a drop in
:47:30. > :47:34.price the project is very ddlayed. So I think it does meet the criteria
:47:35. > :47:40.for a well-designed transfer of risk. In an area where risk has
:47:41. > :47:50.never been effectively transferred from the buyer to the seller before.
:47:51. > :47:54.Thank you. As part of the m`king the economy work for everyone, the
:47:55. > :47:59.government has said that thdy are going to have a strong industrial
:48:00. > :48:06.strategy at its heart. So I would like to explore with you how much
:48:07. > :48:13.that is a significant changd from what was pursued under Mr C`meron's
:48:14. > :48:19.government. And if I may, I can divide that in the two. The money
:48:20. > :48:24.aspect, which I think Lance well and truly in your department, and there
:48:25. > :48:29.is perhaps a more order right - broad a brush of policy isste in
:48:30. > :48:35.terms of, what does that me`n for policy change? Have you any comments
:48:36. > :48:39.and information on that? First of all, the industrial strategx is a
:48:40. > :48:53.new departure. It is being worked up now. The Department for bushness
:48:54. > :48:58.enterprise and the other thhnk. . The department that has changed its
:48:59. > :49:04.name more than any other department in history is currently working up a
:49:05. > :49:11.strategy. The Treasury is obviously involved, but it is the lead
:49:12. > :49:16.innovation Department for enterprise and innovation schools. And in due
:49:17. > :49:22.course, there will be a consultation document published. But the
:49:23. > :49:26.underlying focus is that thhs economy, although it has done some
:49:27. > :49:32.remarkable things over the last year's, it has delivered 2.7 million
:49:33. > :49:37.new jobs, a remarkable achidvement, especially when compared with the
:49:38. > :49:42.performance in some of our principal competitors in Europe. What it has
:49:43. > :49:47.not delivered is growing productivity. And what we most
:49:48. > :49:53.urgently needs now to focus on is growing the productivity performance
:49:54. > :49:57.of the economy in order to support rising real wages and rising living
:49:58. > :50:04.standards. There is no other sustainable way to deliver rising
:50:05. > :50:15.living standards on a sustahned basis and growing productivhty. And
:50:16. > :50:23.we consider that a more acthve approach to industry is reqtired, in
:50:24. > :50:29.order to achieve that objective Including looking at the relarkable
:50:30. > :50:31.disparity between productivhty, performance -- productivity
:50:32. > :50:38.performance in London and the South East and the other parts of our
:50:39. > :50:44.country. Including observing that unlike many competitor countries,
:50:45. > :50:49.our secondary cities have v`ry considerably poorer producthvity
:50:50. > :50:52.performance than our capital city. And by addressing those disparities,
:50:53. > :50:57.it is not that the UK econoly does not know how to deliver
:50:58. > :51:02.productivity, London and thd South East are as productive as any region
:51:03. > :51:07.in the European Union. But we have not worked out how to spread that
:51:08. > :51:10.productivity performance more evenly across the economy. And that is the
:51:11. > :51:16.key challenge that we need to address. So it is a bit likd the
:51:17. > :51:21.Northern Powerhouse type of things? The Northern Powerhouse project is a
:51:22. > :51:27.project which should looks to harvest the benefits of
:51:28. > :51:32.agglomeration. It observes that there four great Northern chties
:51:33. > :51:35.which are close enough together given enhanced transport links and
:51:36. > :51:40.they have poor transport links between them at the moment, to
:51:41. > :51:45.create a single Labour markdt, a single goods market, a single
:51:46. > :51:50.economic geography. Economic theory tells us we should expect to see a
:51:51. > :51:55.transformation in productivhty performance of that agglomerated
:51:56. > :52:01.economy. That is the principle behind Northern Powerhouse. But
:52:02. > :52:07.there are other focuses arotnd the country which are equally
:52:08. > :52:13.susceptible to support, to `chieve higher productivity perform`nce The
:52:14. > :52:19.gains are eye watering. The statistic is that if we werd able to
:52:20. > :52:24.spread, if we were able to close by 50% the gap between the productivity
:52:25. > :52:31.of London and the South East and the rest of England, we would increase
:52:32. > :52:37.GDP by ?300 billion. That is a remarkable figure and a rem`rkable
:52:38. > :52:41.potential for us as a nation. Given what you have said about thd lack of
:52:42. > :52:47.productivity, the lack of connectivity between those cities,
:52:48. > :52:51.is it more sensible to do the East- West rail line ahead of the self?
:52:52. > :52:56.They are not alternatives. Ht is important to do both and by
:52:57. > :53:03.predecessor made clear the government wants to press ahead with
:53:04. > :53:10.the East- West route. From Liverpool across the Pennines. And in fact, a
:53:11. > :53:14.sum of money, I cannot remelber if it was 50 million, ?80 millhon, that
:53:15. > :53:17.was made available for detahled feasibility studies. You wotld
:53:18. > :53:22.expect them to go forward simultaneously? I cannot sax
:53:23. > :53:30.simultaneously. HS2 is a long-term project, it will take a dec`de and a
:53:31. > :53:34.half to complete. I suspect that the East -- West Pennine railwax may be
:53:35. > :53:41.a shorter duration project `lthough I am not an expert. We do not have a
:53:42. > :53:46.validated plan for it yet. Hf I can go back onto the policy aspdct, does
:53:47. > :53:55.that mean the industrial strategy would not be looking at things such
:53:56. > :53:59.as attitudes to takeovers? @nd whether sometimes, certain companies
:54:00. > :54:04.should not be taken over because one cannot actually deliver, or the
:54:05. > :54:08.companies that take them ovdr cannot deliver on many of the promhses that
:54:09. > :54:16.they make at the point of t`keover? We have a much more robust system
:54:17. > :54:22.for securing commitments in the takeover process. Then we h`ve had
:54:23. > :54:31.before. We have applied that system in relation to the recent t`keover
:54:32. > :54:37.by Softbank, whether commitlents are made in a form that or enforceable
:54:38. > :54:41.through the takeover panel. -- where the commitments. I am not going to
:54:42. > :54:44.set out in detail what the industrial strategy is going to
:54:45. > :54:49.include, the Prime Minister has made it clear that while we welcome
:54:50. > :54:54.investment from overseas in the UK and indeed we need investment from
:54:55. > :54:59.overseas in the UK, we are interested in investment th`t will
:55:00. > :55:03.grow and build businesses hdre. We are not interested in asset
:55:04. > :55:08.strippers coming in and buyhng up businesses to take them apart. And I
:55:09. > :55:15.think you can anticipate th`t that view will be expressed in industrial
:55:16. > :55:19.strategy. As a final point, could I ask you whether you would think that
:55:20. > :55:25.you might be prepared to find more money for things like the British
:55:26. > :55:31.Business Bank and also, would you be extending the sort of guarantees
:55:32. > :55:38.that are envisaged under Brdxit the funding channels, given through the
:55:39. > :55:48.IB and the EIF? First, the British Business Bank is already delivering
:55:49. > :55:53.and supporting over ?7.5 billion of investment, lending to over 48, 00
:55:54. > :56:02.firms. So it is doing a significant job already. The lending from EIB,
:56:03. > :56:05.we will watch very carefullx. Britain remains a full membdr of the
:56:06. > :56:10.European Union and we expect that projects from the UK will bd treated
:56:11. > :56:17.absolutely on their merits `nd the UK historically, because we deliver
:56:18. > :56:23.strong projects, has done disproportionately well out of the
:56:24. > :56:28.EIB funding. We expect that EIB funding the UK projects will
:56:29. > :56:32.continue right up to the pohnt of departure from the European Union.
:56:33. > :56:40.And obviously as part of thd process of exiting the EU, we will have to
:56:41. > :56:45.put in place appropriate alternative arrangements for not just EHB, but
:56:46. > :56:49.for every, but for everything for which we are currently dependent
:56:50. > :57:02.upon a EU structure or insthtution. I wanted to talk to you abott
:57:03. > :57:08.Brexit. I didn't want to ask you what it means. You can ask le what
:57:09. > :57:12.it means if you like! I think I know the answer to that one. I w`nt to
:57:13. > :57:17.ask you what you would like it to mean. Mr Davies told the Hotse of
:57:18. > :57:23.Commons on Monday that it w`s very improbable that the United Kingdom
:57:24. > :57:27.could remain in the single larket, and Lord Lawson told Times readers
:57:28. > :57:32.last week that it was highlx undesirable to remain in thd single
:57:33. > :57:36.market, the aim should be to get out and deregulate much further and
:57:37. > :57:41.faster. You told the BBA in July that it was in the interest of the
:57:42. > :57:51.UK and the other member states to keep things as they are for finance.
:57:52. > :57:55.So I did use that you don't agree with Mr Davies and you don't agree
:57:56. > :58:03.with Lord Lawson, and you yourself would like for financial services to
:58:04. > :58:09.see us remain in or as closd to the single market as possible, `m I
:58:10. > :58:14.right? I should make clear that you're quoting my remark th`t the
:58:15. > :58:20.BBA which was on the evening of the 12th of July, the day beford I was
:58:21. > :58:26.appointed to this role so I was speaking as Foreign Secretary rather
:58:27. > :58:30.as Chancellor of the Excheqter. Sorry about your demotion! H
:58:31. > :58:39.certainly got a smaller offhce as a consequence of the change of job!
:58:40. > :58:44.One of the things we've got to get away from here is talking as if
:58:45. > :58:51.there is only pre-existing lodel. And we have to use the pre-dxisting
:58:52. > :58:54.language. The UK is not Norway, it's not Switzerland, it's not even
:58:55. > :58:59.Canada. We are the world's fifth-largest economy. The
:59:00. > :59:04.arrangements that we negoti`te with the European Union will be
:59:05. > :59:10.displayed. I have no doubt whatsoever that. The point H was
:59:11. > :59:18.making to the BBA is that there are very good reasons to think that it
:59:19. > :59:23.is in the interests of the overall economies of the European Union
:59:24. > :59:31.countries as well as the UK economy that London, as Europe's financial
:59:32. > :59:34.centre, remains broadly as ht is. I know it's probably become qtite
:59:35. > :59:38.fashionable among public ophnion to think that banks mainly exist to
:59:39. > :59:44.trade with themselves, but they don't. They exist to support the
:59:45. > :59:49.real economy. The financial services market is that essentially to
:59:50. > :59:51.support the real economy. London's financial services market stpports
:59:52. > :59:58.the real economy across Europe and not just in the UK. German car
:59:59. > :00:05.manufacturers, Italian manufacturers of consumer white goods, usd the
:00:06. > :00:10.City of London to deliver fhnance and financial services, and I
:00:11. > :00:14.believe that the structures that we have in London, very complex
:00:15. > :00:19.ecosystem of banks, funds, hnsurance companies, law firms, busindss
:00:20. > :00:26.services firms, would not and could not be replicated anywhere dlse And
:00:27. > :00:33.to break it up or to try to damage it in the pursuit of some vdry
:00:34. > :00:38.narrow and hypothetical nathonal advantage would be a huge mhstake
:00:39. > :00:43.for any of our European Union partners to follow. I genuinely
:00:44. > :00:48.believe that London delivers not only for the UK but for the European
:00:49. > :00:56.Union as a whole. I agree whth everything you say. But I w`s trying
:00:57. > :01:01.to tempt you to be more prescriptive than descriptive. How would you deal
:01:02. > :01:05.with the interesting paper that the Japanese government put out while
:01:06. > :01:09.you work in China, where thdy say that if their financial sector is to
:01:10. > :01:13.keep its current presence in London, they will want their banks to retain
:01:14. > :01:20.pas sporting rights across Durope and the freedom to provide other
:01:21. > :01:23.services across Europe. Thehr banks and financial institutions hn London
:01:24. > :01:31.to be able to move their people in and out of London. They would want
:01:32. > :01:34.our financial services regulation to remain harmonised with EU fhnancial
:01:35. > :01:37.services regulation and thex would want transactions in the ye`r rose
:01:38. > :01:43.to continue to be cleared through London. Is that what you want to
:01:44. > :01:50.see? Do you think you can achieve what the Japanese say they think you
:01:51. > :01:57.should be aiming to achieve? First of all on passporting it is in our
:01:58. > :02:02.interest and the European union interest as well to have as free and
:02:03. > :02:08.open access to each other's markets are not just in financial sdrvices
:02:09. > :02:16.but in other trade areas as well. But, we cannot accept uncontrolled
:02:17. > :02:21.free movement of people. Th`t is the political outcome of the referendum
:02:22. > :02:26.decision that was made. I don't think that needs to strike fear into
:02:27. > :02:35.the heart of Japanese financial institutions because I would expect
:02:36. > :02:40.that using the control that we will have over movement of peopld, we
:02:41. > :02:45.would use it in a sensible way that would certainly facilitate the
:02:46. > :02:51.movement of highly skilled people between financial institutions and
:02:52. > :02:56.businesses in order to support investment in the UK economx. That
:02:57. > :03:01.would certainly be my expectation. You've just mentioned clearhng.
:03:02. > :03:12.Maybe I'll just say a word on clearing. There have been v`rious
:03:13. > :03:16.things said about clearing `nd euro denominated clearing. I'm bx no
:03:17. > :03:21.means an expert although I'd spent time talking to people who `re.
:03:22. > :03:26.Clearing in London is a massive business and it benefits from huge
:03:27. > :03:31.economies of scale. The cle`ring of instruments denominated in different
:03:32. > :03:38.currencies together delivers a huge efficiency in the process. Lost of
:03:39. > :03:44.the people that I am talking to do not believe that you can brdak off
:03:45. > :03:49.bits of the clearing system. Most of them do not believe that yot could
:03:50. > :03:56.persuade clearing to go to `ny place where it doesn't want natur`lly to
:03:57. > :04:01.go. And that actually, after London, probably the most likely destination
:04:02. > :04:07.for clearing operations would be New York, not Paris or Frankfurt or
:04:08. > :04:13.Dublin or Amsterdam. And anxthing which split clearing up, or tried to
:04:14. > :04:18.force it to relocate, would simply force up the cost of clearing with a
:04:19. > :04:26.huge cost to the European economy as a whole. I agree with you strongly.
:04:27. > :04:30.But you didn't pick up all the Japanese shopping list. You didn't
:04:31. > :04:34.pick up their reference to the desirability of from their point of
:04:35. > :04:39.view if they were to retain their current financial services presence
:04:40. > :04:43.in London, of our regulation to remain close to or harmonisdd with
:04:44. > :04:51.EU regulation. Where do you stand on that? I thought I captured that in
:04:52. > :04:55.passporting. Clearly if we `re to have a passporting regime wd would
:04:56. > :05:01.expect to have a regulatory regime which was comparable and well
:05:02. > :05:07.harmonised with those of thd countries into which we werd
:05:08. > :05:11.passporting. I wonder whethdr you would not agree that there hs too
:05:12. > :05:15.much generalisation when it comes to talking about the concept of
:05:16. > :05:21.passporting and what needs to be done is to look at it sub sdctor by
:05:22. > :05:27.subsector. I wonder if I cotld quote a letter written, I can't n`me the
:05:28. > :05:36.author for confidentiality reasons, but a very senior figure in the city
:05:37. > :05:39.where he wrote "No one has come forward with documented evidence of
:05:40. > :05:44.why the city's wholesale markets would suffer from the loss of
:05:45. > :05:49.passporting writes, financi`l services being terror free. Which of
:05:50. > :05:54.the services requires access in that sense? Execution of orders on
:05:55. > :05:58.London's various exchanges? Participation in the interb`nk
:05:59. > :06:05.market? No. Raising capital in the city through bond and share issues?
:06:06. > :06:16.No. Participating in these deals? No. Seeking corporate advicd? No.
:06:17. > :06:19.Who establishes branches and subsidy arrears on the continent for
:06:20. > :06:28.wholesale services in the dhgital age? I have checked with thd big
:06:29. > :06:33.asset managers come another have ever sold only on the continent
:06:34. > :06:40.They already distribute through Luxembourg or Dublin subsidx
:06:41. > :06:49.arrears." Can you specify any subsectors he has excluded? The
:06:50. > :06:54.obvious subsector is banks delivering service to corporate
:06:55. > :06:58.clients in the real economy across European union where they would need
:06:59. > :07:08.pas sporting rights. I think all I can do is listen to the advhce from
:07:09. > :07:11.the sector itself. The sector itself says that passporting is very
:07:12. > :07:20.important but does also recognise that not all subsectors of financial
:07:21. > :07:27.services require passporting. I don't think I can say any more than
:07:28. > :07:31.that at this stage. On the same subject of Brexit, you talkdd about
:07:32. > :07:36.the political imperative of ending free movement. To end free lovement
:07:37. > :07:40.is incompatible with membership of the single market. I wonderdd if you
:07:41. > :07:45.would continue to agree with your predecessor's estimate of a 6%
:07:46. > :07:49.reduction in UK GDP if we wdre to leave the single market, and if not
:07:50. > :07:58.what you thought the economhc consequences might be? Therd are two
:07:59. > :08:04.impacts from the two strands of economic impact from the referendum
:08:05. > :08:09.decision. An uncertainty impact which we have already seen, which is
:08:10. > :08:14.already having an effect. And which we are seeking to address through
:08:15. > :08:19.the measures already announced. And which we might expect we'll more or
:08:20. > :08:25.less continue to exist for so long as the negotiations go on. @fter an
:08:26. > :08:31.initial shock, the economy hs stabilised, much of the losses in
:08:32. > :08:35.markets have come back. I think we should be realistic and expdct that
:08:36. > :08:39.over the period of negotiathon there will be ups and downs. As the
:08:40. > :08:47.process progresses in the w`y that these processes do. There is then
:08:48. > :08:54.potentially a second impact, when we get to the end of the negothations
:08:55. > :08:58.and we have an agreement. Btsiness, investors, markets, will look at
:08:59. > :09:01.that agreement and will dechde whether it represents broadly the
:09:02. > :09:07.assumptions that they have lade in which case there will be no further
:09:08. > :09:12.impact. Or they will decide that it's worse than they thought or
:09:13. > :09:15.better than they thought. That's broadly the structure of wh`t will
:09:16. > :09:20.happen. I don't think that H can speculate today about whethdr there
:09:21. > :09:24.will be any further impact, when it will come or what it might look
:09:25. > :09:33.like, that will depend entirely on the progress and outcome of the
:09:34. > :09:37.negotiations. On that point, you are right to say there could be a
:09:38. > :09:41.subsequent impact. Clearly `ny subsequent impact would be far
:09:42. > :09:48.greater than the uncertaintx shock if we were to leave the single
:09:49. > :09:53.market. Not necessarily. But there may be further impact. We jtst have
:09:54. > :09:57.to be prepared for this. And in setting up our structures, we had to
:09:58. > :10:01.give ourselves enough flexibility to be able to respond in a way that
:10:02. > :10:09.supports the economy if it needs support at any point during this
:10:10. > :10:13.process. I must say I was mtch encouraged by the governor of the
:10:14. > :10:18.Bank of England's remarked `t the select committee yesterday when he
:10:19. > :10:22.said the financial system h`s failed through an unexpected result. Can I
:10:23. > :10:27.just go back to passporting. I don't really understand what the problem
:10:28. > :10:37.is with passporting. Lord L`mont has explained the whole range of areas.
:10:38. > :10:45.My reading... Which comes into effect in January 2018 says that
:10:46. > :10:50.this is a European law requhres the European Union to recognise
:10:51. > :11:02.countries which have systems As our regulatory system is not just
:11:03. > :11:08.compliant, it is identical, where does the problem reside? Is it in a
:11:09. > :11:14.fear that somehow Europe might change the requirements? Or does it
:11:15. > :11:20.reside in a belief that it lay be doesn't cover every single type of
:11:21. > :11:25.transaction? What are these transactions and what are their
:11:26. > :11:35.value which seems minuscule relation -- in relation to the value of the
:11:36. > :11:40.city of London? I cannot answer questions on transactions. H am sure
:11:41. > :11:46.I can write to the chair with answers if that would be helpful.
:11:47. > :11:54.More generally, the concern is that the UK, as the home of the lajority
:11:55. > :12:01.of Europe's financial services business, has been influenthal, some
:12:02. > :12:04.would say hugely influential, in the design of European regulatory
:12:05. > :12:12.structures. And once we leave the European Union, we will not expect
:12:13. > :12:16.to be able to have the same direct level of input. So there is a
:12:17. > :12:21.vulnerability to a future potential divergences. Of course, we `lways
:12:22. > :12:30.have the option of mimicking rules made elsewhere, without our input,
:12:31. > :12:36.precisely in order to maint`in regulatory equivalents. But that
:12:37. > :12:41.would not be without risks. Because we don't necessarily... It hs not
:12:42. > :12:45.necessarily the case that a European Union without Britain in it will
:12:46. > :12:49.think exactly the same way `s Britain does on these questhons But
:12:50. > :12:54.that would apply to every other country or continent in the world,
:12:55. > :13:01.wouldn't it? What you are s`ying is that is not a problem but there
:13:02. > :13:07.could be in the future? It hs now a problem of future proofing the
:13:08. > :13:10.system. And remember what wd are inviting institutions, priv`te
:13:11. > :13:14.financial institutions to do, which is to make a decision that their
:13:15. > :13:19.long-term future is indeed hn London and London's financial markdts will
:13:20. > :13:24.remain but premier financial markets. What is that stuff about
:13:25. > :13:30.these jobs being lost in thd city if it is a future problem and not a
:13:31. > :13:33.present problem? When one looks at impact, one does not only look at
:13:34. > :13:38.immediate impact, but the ilpact over time.
:13:39. > :13:43.The Chancellor made a very strong statement about where you sde the UK
:13:44. > :13:49.within the single market. Which I strongly support. The probldm is,
:13:50. > :13:52.your colleague, at your Cabhnet colleague, the Secretary of State
:13:53. > :13:55.for leaving Europe, gave a different impression at the beginning of the
:13:56. > :14:00.week. When does the governmdnt expect to set out what its position
:14:01. > :14:05.is, the entire government's position, in relation to thd single
:14:06. > :14:09.market, immigration and just about everything else? Either on ` white
:14:10. > :14:13.paper or some other means. This seems to be a long and torttous
:14:14. > :14:17.process and I do not think `nybody would suggest you rush into it but
:14:18. > :14:21.at some stage, given the alternative to being in the European Unhon in
:14:22. > :14:25.detail was never on the ballot paper so nobody looks -- knows wh`t it
:14:26. > :14:31.looks like, when can the government spell this out so we can debate
:14:32. > :14:39.this? Let me be clear what the government's policy is. We want to
:14:40. > :14:43.see the greatest degree possible free access to European markets for
:14:44. > :14:47.our businesses to sell their goods and services. And for that to be on
:14:48. > :14:55.a reciprocal basis. But at the same time, we cannot accept uncontrolled
:14:56. > :15:00.free movement of people. Those are our two key principles in
:15:01. > :15:04.approaching this negotiation. We are doing the work you would expect us
:15:05. > :15:12.to do at the moment. In due course, it will be appropriate to sdrve and
:15:13. > :15:16.Article 50 notice and start negotiating on the process. But as
:15:17. > :15:24.the Prime Minister said yesterday, we do not expect to give a running
:15:25. > :15:29.commentary and while I understand the first for detailed information
:15:30. > :15:35.and answers in the House of Commons, there is an intrinsic tension here
:15:36. > :15:39.between democratic accountability of the government and effectivd
:15:40. > :15:44.negotiation with a third party. Our paramount objective must be to get a
:15:45. > :15:48.good deal for Britain and I am afraid that will not be achheved by
:15:49. > :15:55.spelling out the detail of our negotiating strategy every Wednesday
:15:56. > :16:00.at pro minister's questions. Hold on, it seems what we are getting is
:16:01. > :16:05.a running commentary from v`rious ministers and briefings and so on.
:16:06. > :16:11.But not an issue like this, it seems to me it is rather different from
:16:12. > :16:16.negotiating some treaty or some deal with some third party. On issues
:16:17. > :16:19.like the single market, what trade-offs we might make in relation
:16:20. > :16:24.to free movement, accepting something less than we have got just
:16:25. > :16:30.now in return for getting Access and so on, surely it would be ilpossible
:16:31. > :16:34.to do that in secret, not ldast because people would talk. @nd if we
:16:35. > :16:40.did not, 27 other people around a table would be doing a lot of
:16:41. > :16:44.talking because many have a vested interest in making things dhfficult
:16:45. > :16:49.for us or others to get a bdtter deal themselves. Sure you are not
:16:50. > :16:54.being -- suggesting this can be presented as a fait accomplh to
:16:55. > :16:59.Parliament? Part of our job is to make sure over the coming wdeks and
:17:00. > :17:05.months, as many as possible of those 27 other parties realise it is not
:17:06. > :17:12.in their interest to make this difficult. That their trade with the
:17:13. > :17:18.UK is important. That accessed a London's financial markets hs
:17:19. > :17:23.important. And getting a de`l that works for all of Europe, thd UK and
:17:24. > :17:28.the European Union countries, is going to beat to the benefit of all
:17:29. > :17:32.of Europe at a time when European growth rates are fragile. And we can
:17:33. > :17:37.all do without something th`t is going to cause any further
:17:38. > :17:44.depression of those growth rate But the work that is going on inside
:17:45. > :17:48.government at the moment, the work going on in the Department for
:17:49. > :17:52.exiting the European Union, it is designed to inform the kind of
:17:53. > :17:56.decisions that you talking `bout, to enable the government to make
:17:57. > :18:00.informed choices about its `pproach to the negotiations, the tr`de-off
:18:01. > :18:07.that will be involved in th`t negotiation. In many areas, those
:18:08. > :18:11.trade-offs will be about looking at the economic costs and benefits of
:18:12. > :18:16.different outcomes. But I think it is fair to say in one area, free
:18:17. > :18:21.movement of people, we have a clear mandate through the referendum
:18:22. > :18:28.result that says that we can no longer accept uncontrolled free
:18:29. > :18:34.movement of people. I think we have to take that as a political given.
:18:35. > :18:40.And then look at how, within that constraint, how we deliver the very
:18:41. > :18:45.best possible arrangements for a reciprocal access to markets across
:18:46. > :18:52.Europe. I must take up what Lord Darlington
:18:53. > :18:58.said, your response, which was not my original intention. -- D`rling.
:18:59. > :19:03.You are going to persuade everybody it is in their interest to come to
:19:04. > :19:10.deals with various sorts and you are relying on their good sense of their
:19:11. > :19:15.self interest to reach as r`tional solution and I very much hope that
:19:16. > :19:20.you succeed. But as you madd clear in your last and certain about the
:19:21. > :19:25.constraints on the United Khngdom's position, people do not alw`ys put
:19:26. > :19:31.their rational economic self interests at the top of the lists,
:19:32. > :19:36.it could be argued that in this referendum and in your answdr, we
:19:37. > :19:42.have decided this country to put another factor at the top of the
:19:43. > :19:46.list and that politics has trumped economics. It may be, of cotrse
:19:47. > :19:53.that our colleagues on the other side of the channel might also
:19:54. > :19:57.decide that economic self interest is not the determining factor and
:19:58. > :20:03.that they too will put something else at the top of the list, I hope
:20:04. > :20:06.not. But in the light of our decision, I am sure that yot would
:20:07. > :20:13.accept that others may behave in a similar way. First of all, H do not
:20:14. > :20:19.know if I am going to succedd in persuading people. I firmly believe
:20:20. > :20:24.it is the case that a soluthon which allows European businesses to
:20:25. > :20:30.continue to trade with the TK freely and British businesses to trade with
:20:31. > :20:35.our European neighbours fredly will be very much in the interests of
:20:36. > :20:39.both. I believe that, so I `m not trying to peddle them anythhng but
:20:40. > :20:43.trying to draw their attenthon to the economic facts. Of course you
:20:44. > :20:48.are right that in the immedhate aftermath of the referendum, part of
:20:49. > :20:54.the response was emotional. Very extremely emotional in some cases
:20:55. > :20:58.from some of our European p`rtners. There are now far more rational
:20:59. > :21:06.voices looking at the econolics and saying what we must do now, although
:21:07. > :21:10.they would see it as a suboptimal outcome, is make the very bdst we
:21:11. > :21:15.can of it and protect our own economies. The economy of the
:21:16. > :21:20.European Union. In the best way we can. I would argue logic dictates
:21:21. > :21:28.that that is done by having the most open possible trade arrangelents
:21:29. > :21:33.with the United Kingdom. Now, I am tempted to indulge myself bx just
:21:34. > :21:38.making a comment on motivathon of people in this country who voted to
:21:39. > :21:43.leave. I suspect for some of those people, not all but some, they would
:21:44. > :21:49.have felt they were indeed laking a rational economic decision because
:21:50. > :21:55.for many people, they will have a feeling that the benefits of
:21:56. > :21:58.globalisation and openness, the advantages of influxes of mhgrant
:21:59. > :22:03.workers offering to work for low wages have not worked for them and
:22:04. > :22:09.have meant that they have sden their living standards stagnate even while
:22:10. > :22:14.the economy has been growing. And I think it would be dangerous to
:22:15. > :22:19.assume that those who voted to leave automatically did so for irrational,
:22:20. > :22:27.non-economic reasons. Of cotrse I agree with that. Indeed, I lade a
:22:28. > :22:31.speech along those lines in our debate. All I am saying is that
:22:32. > :22:38.other governments may also find themselves influenced by sililar
:22:39. > :22:42.considerations which will ldad to a result which is not in line with
:22:43. > :22:46.your assessment of their rational self-interest. Of course yot are
:22:47. > :22:52.quite right. One of the adv`ntages I think of allowing some time between
:22:53. > :22:57.the referendum and serving the Article 50 notice is that a debate
:22:58. > :23:06.has started in many European countries. European federathons of
:23:07. > :23:11.industrial producers, trade bodies and associations, financial sector
:23:12. > :23:17.regulators will be talking with the government is about the imp`cts of
:23:18. > :23:24.possible different outcomes. And I would expect those people to be
:23:25. > :23:29.generally, in the majority, arguing for following rational economic
:23:30. > :23:35.interest, rather than emotional responses to what has happened. Our
:23:36. > :23:39.challenge is to end zero th`t when we come to the negotiations, we are
:23:40. > :23:43.negotiating with people who are seeking to achieve the best possible
:23:44. > :23:49.economic outcomes for their nations -- to ensure all. I am confhdent
:23:50. > :23:53.that the best economic outcome for our 27 European neighbours will be
:23:54. > :23:58.the best economic outcome for us as well, free and open trade bdtween
:23:59. > :24:04.our countries. The additional costs that are likely
:24:05. > :24:10.to be incurred by the government as a result of pursuing Brexit, is
:24:11. > :24:15.there a budget for the negotiators being hired for instance? And after
:24:16. > :24:20.Brexit, although I understand you do not know exactly what form ht will
:24:21. > :24:27.take, there will be additional costs the government incurs. For hnstance,
:24:28. > :24:31.deaf will have to take on a lot of responsibilities, currently
:24:32. > :24:38.outsourced to Europe. Is thdre any foresight as to what these numbers
:24:39. > :24:43.might look like. Those camp`igning to leave said there would bd a huge
:24:44. > :24:47.surplus resulting from the dnding of a budget contribution to thd
:24:48. > :24:52.European Union. In terms of process, you would expect me to say `s
:24:53. > :24:55.Chancellor that my starting assumption is that the scendry -
:24:56. > :25:02.machinery of government changes will be neutral overall. But any
:25:03. > :25:07.additional costs will be very modest in the context of overall government
:25:08. > :25:10.spending. Looking beyond our exit from the European Union and you
:25:11. > :25:16.mentioned DEFRA specificallx, the UK will have to devise a systel of
:25:17. > :25:23.support for farmers. But it will be a system which recognises the needs
:25:24. > :25:28.and the particular attributds of British farmers, not one th`t is
:25:29. > :25:33.designed to fit the entire Duropean Union. It will be a matter of policy
:25:34. > :25:37.decision for the British Government and the British Parliament whether
:25:38. > :25:42.we should spend more, less or the same amount on farming support after
:25:43. > :25:47.the point, after 2020. I have already given a commitment that up
:25:48. > :25:53.until 2020, if we leave before Twenty20, we will continue to spend
:25:54. > :25:57.at the anticipated see AP ldvels in support of British farmers. So we
:25:58. > :26:05.will have those choices. But given that we do currently have, we are a
:26:06. > :26:10.net contributor to the European Union budget, they would not expect
:26:11. > :26:18.overall the process the lead in itself to additional fiscal
:26:19. > :26:21.pressure. The greater risk of fiscal pressure is any incidental dffect of
:26:22. > :26:26.this process which slows down the growth of the economy, that is what
:26:27. > :26:37.will deliver the fiscal pressure we need to think about. There `re
:26:38. > :26:44.various levers that will be between 41 or fall off and negotiathons will
:26:45. > :26:50.let you find out where thosd going to be. Let's say there is stccess
:26:51. > :26:54.and you get something that hs essentially the kind of fred trade
:26:55. > :27:00.arrangements with the EU th`t you want, where does that leave, with
:27:01. > :27:04.trying to make our own free trade agreements with the rest of the
:27:05. > :27:12.world? Would it mean we would have to stay in the customs union and
:27:13. > :27:17.give that