Live Economy Committee Select Committees

before a parliamentary commhttee. You can continue watching btsiness

in the Commons on our website and we will return to the chamber `fter the

committee has finished. To hnform Parliament that I have decided to

give my first Autumn Statemdnt to Parliament on the 23rd of November

2016. The Autumn Statement will set up the government 's economhc and

fiscal plans based on the l`test forecasts from the Office for Budget

Responsibility. In the run-tp to the Autumn Statement I will be hn

gauging with Britain's business leaders, employee represent`tives

through a series of industrx round tables, meetings and visits, and of

course I will engage with Parliamentary colleagues. Thank you.

I'm sure a number of the topics we will want to ask you about today

will of course be relevant to the Autumn Statement and we are keen to

hear your thinking and your general approach to some of the key issues.

Perhaps I can start off with housing which as you know we published a

report on housing just before the summer. Our conclusion was that in

order to meet demand, catch up on unmet demand and also to moderate

house price rises and make house prices over time more affordable to

young people who are seeking to buy homes, we would need to build

300,000 homes a year, which is about 50% above the government's current

target. In order to achieve that, local authorities would havd to play

a major role. And there would need to be a shift of emphasis away from

houses for sale to social housing to meet a larger need in that `rea And

we would very much welcome xour thoughts on those conclusions, and

in particular, what arrangelents you could contemplate to enable local

authorities to take advantage of the historically low long-term hnterest

rates to invest in social housing in partnership with the privatd sector

and housing associations. Which of course would generating, ovdr a

considerable period of time. I welcome the central recommendation

of your report which is that we need to increase housing supply. The

government is committed to increasing house-building. Ht won't

surprise you to know that this is an area that we are looking at very

closely. Both because it gods to the heart of the Prime Minister's agenda

of creating an economy that works for everybody. Too few people are

able to get onto the housing ladder and too few people are able to

access appropriate housing whether by purchase or for rent. Thdre are a

number of aspects to that problem. It is also a macro economic problem.

It has a huge impact on the overall functioning of the economy, and a

distorted impact. It's an area that has our full attention at the

moment. In due course we will announce how we intend to proceed. I

can confirm that we share the committee's analysis but thdre needs

to be an increase in the rate of house building. We want to see a

diversity of tenure types available, and we will bring forward policy

announcements in due course. That's all I can say at the moment. Do you

share our recommendation and enthusiasm for local authorhties to

resume their historic role `nd play a significant part? And if so how

would they finance that? Thd housing revenue account has some rather

curious limits on it and thd way it enables local authorities to build

swimming pools, apparently `ny number of swimming pools, btt not

build houses which seems to be a rather perverse outcome of the

current rules. There is rool in existing housing revenue account

authorities. There is I'm told 3.4 billion of borrowing headroom

underneath the cap and a ?300 million extension to HRA borrowing

limits that was announced and was undersubscribed. I'm not convinced

it is lack of access to borrowing that is preventing local authorities

from building. We will cert`inly look at local authorities rdgistered

social landlords, and the private sector, and indeed the corporate

sector as being potentially parties who can play a part in dealhng with

the country's overall housing needs. I think we all know that thhs is not

primarily a financing challdnge It's a land availability ch`llenge

that we have to address in order to bring down house prices to

affordable levels on a sust`inable basis. That wasn't the eviddnce that

we heard. There is a large number of permission Heinz granted evdry year

of which only half are built. A great deal of public land which

could be pressed into service to be building houses was very slow in

becoming available. Again there is a role for the government there. We

felt the Treasury with its new infrastructure commission would be

able to play a role of drivhng that through and hitting those t`rgets.

The Treasury does play a role. The housing implementation task force

which oversees the release of public sector land is attended by the Chief

Secretary. I have some experience of this from my days as Secret`ry of

State for Defence, the biggdst release of land for housing

development. The challenges that many of the sites that government

has available for release are very, very large strategic sites. RAF

airfields perhaps, quite a long way from it existing infrastructure

They may overtime deliver vdry large numbers of housing units but they

will require very large amotnts of infrastructure and inevitably need

phased development. If I cotld also make a couple of observations, one

of the challenges in addressing the discrepancy between planning

permission is granted and planning permissions built is the tendency of

local authorities, and I colpletely understand why they find it

convenient to do so, to meet their housing needs by releasing ` small

number of very large sites, often sites that need very signifhcant

infrastructure investment. Inevitably that leads to a lack of

competition in local markets because you have effectively a monopoly

supplier controlling such a site. And the other point is that there is

not any such thing as the UK housing market. Housing markets are highly

local and there is overall ` mismatch between where the planning

permissions are being grantdd and where the hotspots of demand exist.

The reality is that we have to address some very challenging

question of how we deliver hncreased housing availability in the areas

where the high levels of hotsing demand exist. As you go through your

consultation process for thd Autumn Statement, I would humbly stggest

you should consider discusshng this with local authorities who show a

great deal of enthusiasm to get building. They obviously have a

great deal of local knowledge but they don't have the finance to do it

and feel that is a pressing pressure that they want the Treasury to

address. am a director of Morgan Stanley

Chancellor, I want to start by asking about resetting economic

policy. I'm interested in your view on the balance between what monetary

policy can do and what fisc`l policy can do. In particular do yot accept

that monetary policy has possibly run its course in this country and

probably in Europe as well, and that as interest rates come near zero or

below zero in some cases, if you really want to put money into the

economy then its fiscal polhcy that is likely to shoulder the greater

burden. I wonder if I can draw you on where you stand philosophically

on that point? The comment H made was that we would have an

opportunity to reset fiscal policy. By which I was referring to the fact

the Prime Minister has made clear that we will no longer be sdeking to

reach a fiscal surplus in 2019 2020. Clearly we need to put a new

fiscal framework in place to guide policy as we move away from that

target. Clearly monetary policy is the remit of the Bank of England and

I don't want to say anything that might undermine their clear

responsibility and independdnce in this area. The governor has made it

quite clear that he thinks that he does have further ammunition in the

bank 's locker. Not only in terms of rate reduction, but in terms of

unconventional monetary polhcy. I think that monetary policy can and

should operate alongside fiscal policy, the bank was the first mover

if you like after the shock to the economy of the referendum exit vote.

I will have an opportunity on the 23rd of November to consider whether

a fiscal response is appropriate, alongside that monetary polhcy

response. And I think both policy levers are valid and have a role to

play. I appreciate the point you made about the reset. The government

was never going to hit that particular target I suspect. I want

to draw you on the fiscal aspect. Would you be prepared or do you

think it would be right that if we are wanting to put more mondy into

the economy to get the economy going and put the inflation rate tp, it's

more likely than not it is fiscal policy that will do it rathdr than

what is left in the monetarx policy locker?

in relation to fiscal policx, do you believe that you should be looking

at infrastructure projects, targeting tax measures on those who

spend the money the rather than those who save it. If there is a

need at any time to deliver a fiscal 's stimulus for broader reasons it

had to be well designed. It has to be limited in duration, quick in

delivering effect and given our overall fiscal position which is

still unhealthy, ideally, it will be contributing to the long-term

investment needs of the country contributing to the challenge of

raising productivity and growth rates, so therefore, I would hope

that any sensible Chancellor would seek to do as much as possible

through investment, that will not only deliver short-term dem`nd

stimulus, but help problems in the economy. So perhaps smaller projects

rather than things like HS2? I have to say that I think there is a role

for big, strategic projects, but they are unlikely to be abld to

contribute a fiscal stimulus because the timelines that are involved I'm

also a great agree of the Eddington principle, what is modest and

rapidly deliverable, with the most immediate impact, but also, in some

races on the railway. Do yot think negative interest rates can ever

work? I think that's a question for the Bank of England? You must know?

But I think you should ask that question to the Governor of the Bank

of England. I'd like to ask a couple of questions about Q E. Abott the

involvement of the Treasury. If I understand correctly, the Treasury,

when a tranche of Q E, of gdneral improvement over timing, thd -- the

exact nature, the Treasury gives its in approval. So when it givds

approval, does the Treasury itself take the view of the appropriateness

of Q E on the economy at th`t point? The bank approached the Tre`surer...

I can only speak about the specific example that occurred on thd 4th of

August. The bank approached the Treasury and said it would like to

seek an indemnity from the Treasury to take further steps of

quantitative easing. The Trdasury of course had to issue an indelnity,

but those measures have an hmmediate impact on public sector net debt.

It's therefore of considerable interest to the Chancellor regarding

overall fiscal aggregates. The bank approached the Treasury. Obviously,

I took advice from the Treasury but it is not the Treasury's job to

second guess the monetary policy committee's recommendation. Our job

was to look and see if we could appropriate the indemnity and bear

the impact on public sector regarding the debt. We thought both

were appropriate. Can I follow up where Lord Darling almost wdnt on

the effect is nurse of Q E. -- the effectiveness. In 2000 and dight, in

America, or 2009 here when P E was first introduced, people thought it

was a tempting measure. I don't think many people would havd

quarrelled with it at the thme. But here we are, eight years further on

and people are still continting with it. I think it would be fed to say

that the results of Q E in the recent past, there is some `rgument

and dispute about it, but on the other hand, the distorting dffects

of Q E, I think there is more unanimity about the effects on bond

markets, equity markets, high yielding equities. The effects on

property prices, pension fund deficit. I think many peopld are

getting a little bit worried about this effect and feeling that these

central banks have been pushing things, really suppressing

volatility and this is at the price and the risk for this unwinding

introducing further down thd line, period of greater instability. I

think a great deal has changed in the global economy since thd point

where the Bank of England w`s given independent responsibility for

monetary policy. I can only repeat what I have said earlier. I think

monetary policy and fiscal policy both have a role to play. It was the

case following the shock of the EU referendum vote that the bank was

able to move quite quickly with a monetary policy measure, whhch I

think the evidence suggest has had some positive effects in restoring

calm to markets, and a meastre of confidence to the economy. That

isn't to aggregate responsibility from the fiscal side, but the bank

was in a position to move fhrst The Treasury which he in a position to

deliver a fiscal responsive appropriate on the 20th heard of

November. -- 23rd. The Government claimed yesterday that the `ction

the bank had taken has prob`bly averted the likelihood of rdcession.

None of us can comment as to whether that was right or wrong, but how

will you charge what the evhdence is as to whether Q E had had an effect

on the course of the economx. It is plainly not sufficient to s`y that

it went one way rather than another. That is not evidence. What would the

evidence be that you would look for? It's a busy difficult to pahnt the

counterfactual, I was showing some of the bank's internal work. It

appears to me that the outcome that we have seen is considerablx less

severe than what the bank's economists were expecting bdfore

before the measure was delivered on the 4th of August, but it whll be

some time into the future bdfore we can look back in any sensible way

and try to distinguish what the contribution of measures taken by

the bank were to the outcomd is that we've seen over the last cotple of

months. The governor said to the Treasury committee that he was

serene about the Bank of England's predictions which is includdd in the

May report. We were told we would have higher interest rates,

technical recession is, and employment would go up and House

prices would fall. The opposite seems to have happened. Are you not

concerned that the whole qudstion about Q E that you made this morning

now resides with the Bank of England, which is having a real

impact, as Lord Lamont has suggested. On House prices. I looked

at the numbers, and if you look at the House rice to earnings ratio

from the last quarter of 2002 to the last quarter of 2015 it has

increased by four point two times 26.9 times and in Greater London

five point nine times 26.12. That's a considerable rise. Are yot not

concerned is that Q E, the latest tranche of Q E will need to be put

into final salary pension schemes? That huge vacuum of money which is

based on artificially low interest rates which would otherwise be

invested in jobs and creating a growth in the economy. Have we not

actually got to the stage where the bank is effectively running economic

policy in a way which is to a disadvantage to the Governmdnt's

declared objective to make wider homeownership available, and able

wells to be spread more equ`lly when it's actually taking wdalth

away from, if I can use the phrase, ordinary, hard-working people, who

-- to those with substantial assets. It is the case that Q E is guilt

upon the principle of causing asset prices to rise. I think we could

have a long debate about wh`t is happening in the housing market I

have no doubt that in the end, it's about supply, demand and balance. If

the supply of land for houshng is increased, no amount of mondtary

inflation is going to force prices to rise in the way that we have

seen. The situation we have in the UK has been, if you like, toxic mix,

increasing money supply, and very constrained resources the btilding

more houses. Obviously, cre`ting an artificial asset price, inflation.

On the wider point, the mondtary policy committee obviously has

responsibility for monetary policy decisions. But as we've alrdady

rehearsed, the governor does require the consent of the Treasury for

unconventional monetary stilulus. It can't be done without the Treasury's

agreement. It would be wrong to characterise the bank seizing

control of economic policy. I was responding to the point you made

that you couldn't comment on it I don't want to comment publicly on a

matter which is a responsibhlity of the monetary policy committde. But I

draw attention again that there are no steps of positive easing that the

bank can take without seeking the approval of the Treasury. Jtst on

the housing point, finally, and I take on the point about the limited

supply. As you say, it's very complicated, but if the House price

to earnings ratio has doubldd in three years, in London, that can't

just be a matter of shortagd of supply. There are other factors

involved here, and similarlx, could you address the point about the

pension funds? For example, which you consider extending the period,

which at the present time companies have got to deal with any ddficit

within ten years. Would you consider extending that period, given that we

are in a highly than usual period and interest rates are such low

levels. I did ask the questhon myself, what has been the ilpact on

funded pension schemes, and the response that I have receivdd, the

advice, is that the additional underfunding is not thought likely

to give rise to any particular problems. There are no pressures for

action coming through in thd sector, because of the fact that thhs is

something that needs to be resolved over a long period. It doesn't

require immediate action, and in the context of the overall penshon

deficit, it is not a step change. Corporations collectively h`ve a

substantial amount of cash hn their balance sheets and so I would

challenge the notion that every pound required to close the pension

fund deficit is snatched aw`y from investment in productive capacity.

I'm You talked about that being a role

for both fiscal and monetarx policy. And of course for much of the 1 80s,

the way this tended to be ptt was wanting to have a fiscal policy that

supported monetary policy. Hn those days the job was to get inflation

down. Now the problem seems to be to get inflation back up to thd target.

Is it not therefore the casd, given that where we are, that mondtary

policy does need some support? Interest rates must be very close to

the limit. We've heard from Lord Lamont about some of the distortions

created by QE. Instead of thinking about this as being too instruments,

is it not the case that mondtary policy really does now need some

support? That the Bank of England is really running out of room to pursue

the line that it has been ptrsuing? First of all the difference in the

1980s was that we did both lonetary and fiscal policy at the tile. As to

your point about the turnaround in inflation, it is important that the

Bank of England's inflation target is asymmetrical one. We see

inflation to low as being as damaging to the economy in the long

term as inflation too high. I can only repeat what the governor has

said. He has said that therd is further capacity, the bank has

further capacity in all thrde areas. That it is used as levers of

monetary policy, and that the bank 's view of the floor limit on

interest rates is a number which is positive but very close to zero And

therefore there is more that the Bank believes it can do if ht is

seen to be appropriate. We `lso clearly, depending on the fhscal

rules that we set, can create at Autumn Statement headroom for fiscal

stimulus, if we believe it hs appropriate to do so. We can create

headroom for fiscal stimulus whether we decide that fiscal stimulus is

appropriate in November 2016 or not. It would be perfectly possible to

design a set of fiscal rules that provides headroom without

necessarily using that headroom at the same time. Could I press on one

aspect of this, very low interest rates. Obviously you can't say much

more about fiscal policy at this stage given that we have thd Autumn

Statement. Do you have any response to the general idea put forward that

at a time when interest ratds are as low as they are, but really the

government should avoid this pursuit of off-balance sheet funding which

it is tried on a number of occasions, using private finance to

do what our public sector projects, and often in more expensive ways

than could be done by the government itself? And is this not a thme when

we should be saying, the government is in a very strong position of

being able to borrow on its own account and it should not bd looking

far and wide for various schemes to really lay off the problem `bout

public sector debt measures? I think, in terms of low borrowing

costs, and the choice betwedn publicly funded and privately

funded... Is never going to revolve around the relative cost of finance

because the government 's cost of finance will always be cheaper than

the private sector's cost of finance. In well-designed

off-balance sheet projects, the real worry is transferring risk to the

private sector partner. And although there are in theory ways of

transferring some elements of that risk to a private sector contractor

partner, for example, while financing on balance sheet, the

reality is if you are financing on balance sheet, the risk alw`ys

bounces back to the financidr in the end. I think, for me, it's `lways

been the case and remains the case that the argument for off-b`lance

sheet financing has to be constructed around the transfer of

risk rather than simply the losing of the inconvenience of the debt

going on the balance sheet. We were looking recently at an issud of the

student loan book and the qtestion of the sale of that. And we

struggled very hard to see where the risk transfer was that was taking

place in this area. And verx much thought this seemed to be an

approach that was being deshgned almost entirely to keep the

borrowing from... The government has a certain borrowing capacitx. PSN D

as a percentage of GDP is not an irrelevant number. Our policy has

been and will remain that where assets in the government balance

sheet serve no policy purpose, they should be disposed of in order to

create headroom for policy driving investment. And in the case of the

student loan book, the policy is achieved without the need to have

the asset sitting on the balance sheets by the government,

underwriting effectively be expected default rate, the expected

non-repayment element of thd student loan book. So I think the policy

intention to dispose of the student loan book remains the right one

Obviously the timing of that decision will be subject to market

conditions. You believe it hs a question of supply and demand. On

the question of the housing. Do you think the government schemes for

effectively subsidising homeownership skew the markdt in a

way that's not helpful? The current range of schemes that we have in

place is certainly designed specifically to support

homeownership. We know that 90% of people aspire to own a home. So in a

sense government policy is responding to the desires and the

aspirations of the electorate. But we also know, don't we, that

although 90% of people may `spire to own a home, in reality far less than

90% of people will actually be able to own a home and it is important

that we have a range of tentre types which reflects the reality of the

world, not just aspirations. I'm very keen to see structures like

shared ownership and rent to buy playing an appropriate role in our

overall housing market mix. Would you agree that subsidising

homeownership does inflate prices? The proposal that the government...

If you are referring to the starter homes scheme, as I understand the

detail of the scheme, the homes that will be delivered effectively

displays what would have bedn affordable homes delivered hn

another way perhaps, afford`ble homes for rent, by focusing the

subsidy that is already implicit in the obligations developers receive

through section 106 agreements and so forth. To focus them on

delivering homes for ownership. But schemes such as help to buy? Help to

buy similarly, helping people to get onto the housing ladder is `

conscious bias in favour of ownership, reflecting the aspiration

of 90% of the population to homeownership. We are looking in the

round at housing and planning policies. These are very colplicated

areas and we will announce `ny policy changes in due coursd. Are

you thinking that the objective of getting to surplus is retained and

you are simply looking at how long you take to do it, or are you

looking at the possibility that surplus itself isn't necess`rily the

right end point for a society which has poor infrastructure, can borrow

at virtually no cost at all, and has plenty of people willing to lend to

the government? You said th`t the PSND needs to be brought down. It

can be brought as a proporthon of GDP can be brought down without

actually getting as far as surplus, it can be done by having a borrowing

requirement two or 3% of GDP perhaps, which is moderate. But you

do not need to go all the w`y to generating a surplus in orddr to

achieve a decline in the debt GDP ratio. If you have a borrowhng

requirement of 2-3% of GDP, unless you have a consistent GDP growth

rate above that level, your PSND will not be going down, it will be

going up. I would suggest that the level of PSND as a ratio of GDP we

are at at the moment, we ard getting quite close to the level th`t might

make a difference to the willingness of markets to lend to us. I don t

think we should be cavalier about the levels of debt. Perhaps I can

help the noble lord by reminding him of what the Prime Minister said at

PMQs on the 20th of July, she said "We have not abandoned the hntention

to move to a surplus. What H have said is we will not target that at

the end of this Parliament." That is what I think is possibly a listake,

is the point I'm making. Can I make one other point on the question of

housing and right to buy. If you are trying to get another 50,000 people

over the line into homeownership, but the supply of houses by private

sector builders does not increase, the only way that is resolvdd is

that you get 50,000 people hn and house prices rise in order to

discourage a different 50,000 from getting on the ladder. So this is an

issue, housing supply incre`ses at the same time, this is a self

defeating prophecy. I have `lready said I completely agree with the

committee's analysis that wd need to significantly increase

house-building rates in this country. And there are many

challenges to doing that. There s a planning challenge, a capachty

challenge in the industry. But it's very clear that this is one of the

factors. If you're looking to answer the question why does the UK economy

perform differently from other comparable economies, particularly

in productivity performance, it seems logical to me to look at ways

in which the UK economy functions differently from other comp`rable

economies. The way our houshng market functions is very cldarly

very different from the way the housing market functions in France,

Germany, the Netherlands, United States, even Japan. And I think we

should probably seek to draw lessons from that. I want to put thhs

question, when you said 90% of people aspire to own their own

homes. I wonder whether you would expect that to change in thd light

of a period of low inflation. As you where the propensity to

homeownership does vary verx considerably amongst Western

European economies. It is a broad generalisation, those that have

endured or suffered bouts of high inflation in the period since the

Second World War tend to have a high propensity for homeownership,

whereas those who have not suffered in that way such as Germany and the

Netherlands, which you've mdntioned, tend to have a low propensity to

homeownership. For much of the lifetime of people around this table

if not at the back of the room, there was a tax incentive to own

your own home through the mortgage arrangements. Well, that's gone Now

we have had some period of low inflation and we might have a good

deal more judging by what is happening. I wondered whethdr in the

light of that you would expdct the propensity to home ownership to

revert to the sort of levels it is in some other countries and was

indeed in this country, before the war?

There is no evidence that the aspiration to own a home has gone

down over the last couple of years when we have had low inflathon. But

there clearly, when you buy a House, and you do two things. You `re

purchasing a place to live `nd using it as a place to live and m`king an

investment which has historhcally turned out to be good for most

people. The factors at work will be people's desire to own the home they

live in which I think is a strong and deep rooted instinct,

independent of the investment performance of the asset. It will be

partly motivated by the likdly return on investment in the asset. I

don't agree with you that housing is no longer tax privilege, tax

privileged class of investmdnt, it is highly tax privileged. Ldss than

it was, I agree. It depends, arguably, the removal of schedule a

taxation greatly enhanced attack villages of owner occupation. It is

still a hugely privileged asset class. And of course, peopld will

also be influenced by alternative asset classes available. How often

do you hear somebody? I suppose the noble lord does not go into a pub!

But I will tell him. You will hear people saying, I do not put money in

a pension, I stick it in brhcks and mortar. People look at the `fter-tax

attractiveness of different asset classes when they look at the

propensity to our home ownership. The people I meet in pubs looking

for somewhere rent. It is more and more difficult. It depends on the

class of pop you go to. Going back to the scepticism about whether the

borrowing rose on local authorities are a real constraint, the local

authority gave as evidence that suggests they strongly thought it

was a constraint. If you don't think it is a constraint, then wh`t would

you do in the important Auttmn Statement to ensure that local

authorities build more housds? Because it is clear if you look at

foreign examples like friends or our own past history that the one thing

that has gone badly wrong in this country is that while the private

sector is still building rotghly the same number of houses, Houshng

Associations and local authorities or not and I wonder if one hs the

crack the supply problem, one is to get them going again, how do we do

that? What I am afraid I cannot do today is to tell you in response to

the question, what are you going to do in your Autumn Statement? I

cannot tell you. But I recognise the challenge and I have said already

local authorities, social l`ndlords, culprits, private house-builders,

they all have to be part of the solution. -- culprits. I noted the

point about local authority borrowing constraints and I have not

met with the LGA, but I will take that question forward. The hard

evidence, which is the available borrowing capacity in housing

revenue, suggests that maybd borrowing is not a constraint. You

have suggested that it is and I will take that up directly with the LGA.

You made a global answer. There are bits of it here and there whth a

real constraint. I accept that and it would be imported to unddrstand

how many authorities there were chafing at the bit to build houses,

unable to borrow to do so. Just going back to well-designed

off-balance sheet transactions. Focusing for a moment on Hinkley

point which seems to be being financed to generate a mere 10%

return, probably twice the level of return expected by infrastrtcture

investors and the tab is behng picked up for the next 35 ydars by

the electricity consumers in this country. In terms of transfdrring

risk, it is one thing to tr`nsfer risk to a corporate entity or a

partnership where you are confident they are going to deliver the goods,

but there seems to be many puestions hanging over whether it in fact

Hinkley Point could ever be delivered so surely it has failed

the test of being a well designed off balance sheet transaction. As

you know, the Prime Minister is reviewing the Hinkley Point project

and has promised to reach a decision by the end of this month. When I

referred to well-designed off-balance sheet transactions, I

was talking specifically about the transfer of risk and the finance of

the projects. I believe the return, they assumed return in the DDF model

is 9%. But what one has to remember is that this project, as proposed,

delivers something that has never been delivered by a civil ntclear

project anywhere in the world. It transfers the design constrtction

and operation risk entirely to the operator. There is a very hdfty

insurance premium in there. And that is why the rate of return m`y look

high. But if the project dods not generate electricity, it will never

generate a penny of return. If it generates late, that will bd a

penalty suffered by the invdstor, the provider, not by the taxpayer or

energy consumer. And the wax the project is structured, therd is a

penalty for late delivery in the price structure. Not only do they

suffer a deferred return on their capital investment but a drop in

price the project is very ddlayed. So I think it does meet the criteria

for a well-designed transfer of risk. In an area where risk has

never been effectively transferred from the buyer to the seller before.

Thank you. As part of the m`king the economy work for everyone, the

government has said that thdy are going to have a strong industrial

strategy at its heart. So I would like to explore with you how much

that is a significant changd from what was pursued under Mr C`meron's

government. And if I may, I can divide that in the two. The money

aspect, which I think Lance well and truly in your department, and there

is perhaps a more order right - broad a brush of policy isste in

terms of, what does that me`n for policy change? Have you any comments

and information on that? First of all, the industrial strategx is a

new departure. It is being worked up now. The Department for bushness

enterprise and the other thhnk. . The department that has changed its

name more than any other department in history is currently working up a

strategy. The Treasury is obviously involved, but it is the lead

innovation Department for enterprise and innovation schools. And in due

course, there will be a consultation document published. But the

underlying focus is that thhs economy, although it has done some

remarkable things over the last year's, it has delivered 2.7 million

new jobs, a remarkable achidvement, especially when compared with the

performance in some of our principal competitors in Europe. What it has

not delivered is growing productivity. And what we most

urgently needs now to focus on is growing the productivity performance

of the economy in order to support rising real wages and rising living

standards. There is no other sustainable way to deliver rising

living standards on a sustahned basis and growing productivhty. And

we consider that a more acthve approach to industry is reqtired, in

order to achieve that objective Including looking at the relarkable

disparity between productivhty, performance -- productivity

performance in London and the South East and the other parts of our

country. Including observing that unlike many competitor countries,

our secondary cities have v`ry considerably poorer producthvity

performance than our capital city. And by addressing those disparities,

it is not that the UK econoly does not know how to deliver

productivity, London and thd South East are as productive as any region

in the European Union. But we have not worked out how to spread that

productivity performance more evenly across the economy. And that is the

key challenge that we need to address. So it is a bit likd the

Northern Powerhouse type of things? The Northern Powerhouse project is a

project which should looks to harvest the benefits of

agglomeration. It observes that there four great Northern chties

which are close enough together given enhanced transport links and

they have poor transport links between them at the moment, to

create a single Labour markdt, a single goods market, a single

economic geography. Economic theory tells us we should expect to see a

transformation in productivhty performance of that agglomerated

economy. That is the principle behind Northern Powerhouse. But

there are other focuses arotnd the country which are equally

susceptible to support, to `chieve higher productivity perform`nce The

gains are eye watering. The statistic is that if we werd able to

spread, if we were able to close by 50% the gap between the productivity

of London and the South East and the rest of England, we would increase

GDP by ?300 billion. That is a remarkable figure and a rem`rkable

potential for us as a nation. Given what you have said about thd lack of

productivity, the lack of connectivity between those cities,

is it more sensible to do the East- West rail line ahead of the self?

They are not alternatives. Ht is important to do both and by

predecessor made clear the government wants to press ahead with

the East- West route. From Liverpool across the Pennines. And in fact, a

sum of money, I cannot remelber if it was 50 million, ?80 millhon, that

was made available for detahled feasibility studies. You wotld

expect them to go forward simultaneously? I cannot sax

simultaneously. HS2 is a long-term project, it will take a dec`de and a

half to complete. I suspect that the East -- West Pennine railwax may be

a shorter duration project `lthough I am not an expert. We do not have a

validated plan for it yet. Hf I can go back onto the policy aspdct, does

that mean the industrial strategy would not be looking at things such

as attitudes to takeovers? @nd whether sometimes, certain companies

should not be taken over because one cannot actually deliver, or the

companies that take them ovdr cannot deliver on many of the promhses that

they make at the point of t`keover? We have a much more robust system

for securing commitments in the takeover process. Then we h`ve had

before. We have applied that system in relation to the recent t`keover

by Softbank, whether commitlents are made in a form that or enforceable

through the takeover panel. -- where the commitments. I am not going to

set out in detail what the industrial strategy is going to

include, the Prime Minister has made it clear that while we welcome

investment from overseas in the UK and indeed we need investment from

overseas in the UK, we are interested in investment th`t will

grow and build businesses hdre. We are not interested in asset

strippers coming in and buyhng up businesses to take them apart. And I

think you can anticipate th`t that view will be expressed in industrial

strategy. As a final point, could I ask you whether you would think that

you might be prepared to find more money for things like the British

Business Bank and also, would you be extending the sort of guarantees

that are envisaged under Brdxit the funding channels, given through the

IB and the EIF? First, the British Business Bank is already delivering

and supporting over ?7.5 billion of investment, lending to over 48, 00

firms. So it is doing a significant job already. The lending from EIB,

we will watch very carefullx. Britain remains a full membdr of the

European Union and we expect that projects from the UK will bd treated

absolutely on their merits `nd the UK historically, because we deliver

strong projects, has done disproportionately well out of the

EIB funding. We expect that EIB funding the UK projects will

continue right up to the pohnt of departure from the European Union.

And obviously as part of thd process of exiting the EU, we will have to

put in place appropriate alternative arrangements for not just EHB, but

for every, but for everything for which we are currently dependent

upon a EU structure or insthtution. I wanted to talk to you abott

Brexit. I didn't want to ask you what it means. You can ask le what

it means if you like! I think I know the answer to that one. I w`nt to

ask you what you would like it to mean. Mr Davies told the Hotse of

Commons on Monday that it w`s very improbable that the United Kingdom

could remain in the single larket, and Lord Lawson told Times readers

last week that it was highlx undesirable to remain in thd single

market, the aim should be to get out and deregulate much further and

faster. You told the BBA in July that it was in the interest of the

UK and the other member states to keep things as they are for finance.

So I did use that you don't agree with Mr Davies and you don't agree

with Lord Lawson, and you yourself would like for financial services to

see us remain in or as closd to the single market as possible, `m I

right? I should make clear that you're quoting my remark th`t the

BBA which was on the evening of the 12th of July, the day beford I was

appointed to this role so I was speaking as Foreign Secretary rather

as Chancellor of the Excheqter. Sorry about your demotion! H

certainly got a smaller offhce as a consequence of the change of job!

One of the things we've got to get away from here is talking as if

there is only pre-existing lodel. And we have to use the pre-dxisting

language. The UK is not Norway, it's not Switzerland, it's not even

Canada. We are the world's fifth-largest economy. The

arrangements that we negoti`te with the European Union will be

displayed. I have no doubt whatsoever that. The point H was

making to the BBA is that there are very good reasons to think that it

is in the interests of the overall economies of the European Union

countries as well as the UK economy that London, as Europe's financial

centre, remains broadly as ht is. I know it's probably become qtite

fashionable among public ophnion to think that banks mainly exist to

trade with themselves, but they don't. They exist to support the

real economy. The financial services market is that essentially to

support the real economy. London's financial services market stpports

the real economy across Europe and not just in the UK. German car

manufacturers, Italian manufacturers of consumer white goods, usd the

City of London to deliver fhnance and financial services, and I

believe that the structures that we have in London, very complex

ecosystem of banks, funds, hnsurance companies, law firms, busindss

services firms, would not and could not be replicated anywhere dlse And

to break it up or to try to damage it in the pursuit of some vdry

narrow and hypothetical nathonal advantage would be a huge mhstake

for any of our European Union partners to follow. I genuinely

believe that London delivers not only for the UK but for the European

Union as a whole. I agree whth everything you say. But I w`s trying

to tempt you to be more prescriptive than descriptive. How would you deal

with the interesting paper that the Japanese government put out while

you work in China, where thdy say that if their financial sector is to

keep its current presence in London, they will want their banks to retain

pas sporting rights across Durope and the freedom to provide other

services across Europe. Thehr banks and financial institutions hn London

to be able to move their people in and out of London. They would want

our financial services regulation to remain harmonised with EU fhnancial

services regulation and thex would want transactions in the ye`r rose

to continue to be cleared through London. Is that what you want to

see? Do you think you can achieve what the Japanese say they think you

should be aiming to achieve? First of all on passporting it is in our

interest and the European union interest as well to have as free and

open access to each other's markets are not just in financial sdrvices

but in other trade areas as well. But, we cannot accept uncontrolled

free movement of people. Th`t is the political outcome of the referendum

decision that was made. I don't think that needs to strike fear into

the heart of Japanese financial institutions because I would expect

that using the control that we will have over movement of peopld, we

would use it in a sensible way that would certainly facilitate the

movement of highly skilled people between financial institutions and

businesses in order to support investment in the UK economx. That

would certainly be my expectation. You've just mentioned clearhng.

Maybe I'll just say a word on clearing. There have been v`rious

things said about clearing `nd euro denominated clearing. I'm bx no

means an expert although I'd spent time talking to people who `re.

Clearing in London is a massive business and it benefits from huge

economies of scale. The cle`ring of instruments denominated in different

currencies together delivers a huge efficiency in the process. Lost of

the people that I am talking to do not believe that you can brdak off

bits of the clearing system. Most of them do not believe that yot could

persuade clearing to go to `ny place where it doesn't want natur`lly to

go. And that actually, after London, probably the most likely destination

for clearing operations would be New York, not Paris or Frankfurt or

Dublin or Amsterdam. And anxthing which split clearing up, or tried to

force it to relocate, would simply force up the cost of clearing with a

huge cost to the European economy as a whole. I agree with you strongly.

But you didn't pick up all the Japanese shopping list. You didn't

pick up their reference to the desirability of from their point of

view if they were to retain their current financial services presence

in London, of our regulation to remain close to or harmonisdd with

EU regulation. Where do you stand on that? I thought I captured that in

passporting. Clearly if we `re to have a passporting regime wd would

expect to have a regulatory regime which was comparable and well

harmonised with those of thd countries into which we werd

passporting. I wonder whethdr you would not agree that there hs too

much generalisation when it comes to talking about the concept of

passporting and what needs to be done is to look at it sub sdctor by

subsector. I wonder if I cotld quote a letter written, I can't n`me the

author for confidentiality reasons, but a very senior figure in the city

where he wrote "No one has come forward with documented evidence of

why the city's wholesale markets would suffer from the loss of

passporting writes, financi`l services being terror free. Which of

the services requires access in that sense? Execution of orders on

London's various exchanges? Participation in the interb`nk

market? No. Raising capital in the city through bond and share issues?

No. Participating in these deals? No. Seeking corporate advicd? No.

Who establishes branches and subsidy arrears on the continent for

wholesale services in the dhgital age? I have checked with thd big

asset managers come another have ever sold only on the continent

They already distribute through Luxembourg or Dublin subsidx

arrears." Can you specify any subsectors he has excluded? The

obvious subsector is banks delivering service to corporate

clients in the real economy across European union where they would need

pas sporting rights. I think all I can do is listen to the advhce from

the sector itself. The sector itself says that passporting is very

important but does also recognise that not all subsectors of financial

services require passporting. I don't think I can say any more than

that at this stage. On the same subject of Brexit, you talkdd about

the political imperative of ending free movement. To end free lovement

is incompatible with membership of the single market. I wonderdd if you

would continue to agree with your predecessor's estimate of a 6%

reduction in UK GDP if we wdre to leave the single market, and if not

what you thought the economhc consequences might be? Therd are two

impacts from the two strands of economic impact from the referendum

decision. An uncertainty impact which we have already seen, which is

already having an effect. And which we are seeking to address through

the measures already announced. And which we might expect we'll more or

less continue to exist for so long as the negotiations go on. @fter an

initial shock, the economy hs stabilised, much of the losses in

markets have come back. I think we should be realistic and expdct that

over the period of negotiathon there will be ups and downs. As the

process progresses in the w`y that these processes do. There is then

potentially a second impact, when we get to the end of the negothations

and we have an agreement. Btsiness, investors, markets, will look at

that agreement and will dechde whether it represents broadly the

assumptions that they have lade in which case there will be no further

impact. Or they will decide that it's worse than they thought or

better than they thought. That's broadly the structure of wh`t will

happen. I don't think that H can speculate today about whethdr there

will be any further impact, when it will come or what it might look

like, that will depend entirely on the progress and outcome of the

negotiations. On that point, you are right to say there could be a

subsequent impact. Clearly `ny subsequent impact would be far

greater than the uncertaintx shock if we were to leave the single

market. Not necessarily. But there may be further impact. We jtst have

to be prepared for this. And in setting up our structures, we had to

give ourselves enough flexibility to be able to respond in a way that

supports the economy if it needs support at any point during this

process. I must say I was mtch encouraged by the governor of the

Bank of England's remarked `t the select committee yesterday when he

said the financial system h`s failed through an unexpected result. Can I

just go back to passporting. I don't really understand what the problem

is with passporting. Lord L`mont has explained the whole range of areas.

My reading... Which comes into effect in January 2018 says that

this is a European law requhres the European Union to recognise

countries which have systems As our regulatory system is not just

compliant, it is identical, where does the problem reside? Is it in a

fear that somehow Europe might change the requirements? Or does it

reside in a belief that it lay be doesn't cover every single type of

transaction? What are these transactions and what are their

value which seems minuscule relation -- in relation to the value of the

city of London? I cannot answer questions on transactions. H am sure

I can write to the chair with answers if that would be helpful.

More generally, the concern is that the UK, as the home of the lajority

of Europe's financial services business, has been influenthal, some

would say hugely influential, in the design of European regulatory

structures. And once we leave the European Union, we will not expect

to be able to have the same direct level of input. So there is a

vulnerability to a future potential divergences. Of course, we `lways

have the option of mimicking rules made elsewhere, without our input,

precisely in order to maint`in regulatory equivalents. But that

would not be without risks. Because we don't necessarily... It hs not

necessarily the case that a European Union without Britain in it will

think exactly the same way `s Britain does on these questhons But

that would apply to every other country or continent in the world,

wouldn't it? What you are s`ying is that is not a problem but there

could be in the future? It hs now a problem of future proofing the

system. And remember what wd are inviting institutions, priv`te

financial institutions to do, which is to make a decision that their

long-term future is indeed hn London and London's financial markdts will

remain but premier financial markets. What is that stuff about

these jobs being lost in thd city if it is a future problem and not a

present problem? When one looks at impact, one does not only look at

immediate impact, but the ilpact over time.

The Chancellor made a very strong statement about where you sde the UK

within the single market. Which I strongly support. The probldm is,

your colleague, at your Cabhnet colleague, the Secretary of State

for leaving Europe, gave a different impression at the beginning of the

week. When does the governmdnt expect to set out what its position

is, the entire government's position, in relation to thd single

market, immigration and just about everything else? Either on ` white

paper or some other means. This seems to be a long and torttous

process and I do not think `nybody would suggest you rush into it but

at some stage, given the alternative to being in the European Unhon in

detail was never on the ballot paper so nobody looks -- knows wh`t it

looks like, when can the government spell this out so we can debate

this? Let me be clear what the government's policy is. We want to

see the greatest degree possible free access to European markets for

our businesses to sell their goods and services. And for that to be on

a reciprocal basis. But at the same time, we cannot accept uncontrolled

free movement of people. Those are our two key principles in

approaching this negotiation. We are doing the work you would expect us

to do at the moment. In due course, it will be appropriate to sdrve and

Article 50 notice and start negotiating on the process. But as

the Prime Minister said yesterday, we do not expect to give a running

commentary and while I understand the first for detailed information

and answers in the House of Commons, there is an intrinsic tension here

between democratic accountability of the government and effectivd

negotiation with a third party. Our paramount objective must be to get a

good deal for Britain and I am afraid that will not be achheved by

spelling out the detail of our negotiating strategy every Wednesday

at pro minister's questions. Hold on, it seems what we are getting is

a running commentary from v`rious ministers and briefings and so on.

But not an issue like this, it seems to me it is rather different from

negotiating some treaty or some deal with some third party. On issues

like the single market, what trade-offs we might make in relation

to free movement, accepting something less than we have got just

now in return for getting Access and so on, surely it would be ilpossible

to do that in secret, not ldast because people would talk. @nd if we

did not, 27 other people around a table would be doing a lot of

talking because many have a vested interest in making things dhfficult

for us or others to get a bdtter deal themselves. Sure you are not

being -- suggesting this can be presented as a fait accomplh to

Parliament? Part of our job is to make sure over the coming wdeks and

months, as many as possible of those 27 other parties realise it is not

in their interest to make this difficult. That their trade with the

UK is important. That accessed a London's financial markets hs

important. And getting a de`l that works for all of Europe, thd UK and

the European Union countries, is going to beat to the benefit of all

of Europe at a time when European growth rates are fragile. And we can

all do without something th`t is going to cause any further

depression of those growth rate But the work that is going on inside

government at the moment, the work going on in the Department for

exiting the European Union, it is designed to inform the kind of

decisions that you talking `bout, to enable the government to make

informed choices about its `pproach to the negotiations, the tr`de-off

that will be involved in th`t negotiation. In many areas, those

trade-offs will be about looking at the economic costs and benefits of

different outcomes. But I think it is fair to say in one area, free

movement of people, we have a clear mandate through the referendum

result that says that we can no longer accept uncontrolled free

movement of people. I think we have to take that as a political given.

And then look at how, within that constraint, how we deliver the very

best possible arrangements for a reciprocal access to markets across

Europe. I must take up what Lord Darlington

said, your response, which was not my original intention. -- D`rling.

You are going to persuade everybody it is in their interest to come to

deals with various sorts and you are relying on their good sense of their

self interest to reach as r`tional solution and I very much hope that

you succeed. But as you madd clear in your last and certain about the

constraints on the United Khngdom's position, people do not alw`ys put

their rational economic self interests at the top of the lists,

it could be argued that in this referendum and in your answdr, we

have decided this country to put another factor at the top of the

list and that politics has trumped economics. It may be, of cotrse

that our colleagues on the other side of the channel might also

decide that economic self interest is not the determining factor and

that they too will put something else at the top of the list, I hope

not. But in the light of our decision, I am sure that yot would

accept that others may behave in a similar way. First of all, H do not

know if I am going to succedd in persuading people. I firmly believe

it is the case that a soluthon which allows European businesses to

continue to trade with the TK freely and British businesses to trade with

our European neighbours fredly will be very much in the interests of

both. I believe that, so I `m not trying to peddle them anythhng but

trying to draw their attenthon to the economic facts. Of course you

are right that in the immedhate aftermath of the referendum, part of

the response was emotional. Very extremely emotional in some cases

from some of our European p`rtners. There are now far more rational

voices looking at the econolics and saying what we must do now, although

they would see it as a suboptimal outcome, is make the very bdst we

can of it and protect our own economies. The economy of the

European Union. In the best way we can. I would argue logic dictates

that that is done by having the most open possible trade arrangelents

with the United Kingdom. Now, I am tempted to indulge myself bx just

making a comment on motivathon of people in this country who voted to

leave. I suspect for some of those people, not all but some, they would

have felt they were indeed laking a rational economic decision because

for many people, they will have a feeling that the benefits of

globalisation and openness, the advantages of influxes of mhgrant

workers offering to work for low wages have not worked for them and

have meant that they have sden their living standards stagnate even while

the economy has been growing. And I think it would be dangerous to

assume that those who voted to leave automatically did so for irrational,

non-economic reasons. Of cotrse I agree with that. Indeed, I lade a

speech along those lines in our debate. All I am saying is that

other governments may also find themselves influenced by sililar

considerations which will ldad to a result which is not in line with

your assessment of their rational self-interest. Of course yot are

quite right. One of the adv`ntages I think of allowing some time between

the referendum and serving the Article 50 notice is that a debate

has started in many European countries. European federathons of

industrial producers, trade bodies and associations, financial sector

regulators will be talking with the government is about the imp`cts of

possible different outcomes. And I would expect those people to be

generally, in the majority, arguing for following rational economic

interest, rather than emotional responses to what has happened. Our

challenge is to end zero th`t when we come to the negotiations, we are

negotiating with people who are seeking to achieve the best possible

economic outcomes for their nations -- to ensure all. I am confhdent

that the best economic outcome for our 27 European neighbours will be

the best economic outcome for us as well, free and open trade bdtween

our countries. The additional costs that are likely

to be incurred by the government as a result of pursuing Brexit, is

there a budget for the negotiators being hired for instance? And after

Brexit, although I understand you do not know exactly what form ht will

take, there will be additional costs the government incurs. For hnstance,

deaf will have to take on a lot of responsibilities, currently

outsourced to Europe. Is thdre any foresight as to what these numbers

might look like. Those camp`igning to leave said there would bd a huge

surplus resulting from the dnding of a budget contribution to thd

European Union. In terms of process, you would expect me to say `s

Chancellor that my starting assumption is that the scendry -

machinery of government changes will be neutral overall. But any

additional costs will be very modest in the context of overall government

spending. Looking beyond our exit from the European Union and you

mentioned DEFRA specificallx, the UK will have to devise a systel of

support for farmers. But it will be a system which recognises the needs

and the particular attributds of British farmers, not one th`t is

designed to fit the entire Duropean Union. It will be a matter of policy

decision for the British Government and the British Parliament whether

we should spend more, less or the same amount on farming support after

the point, after 2020. I have already given a commitment that up

until 2020, if we leave before Twenty20, we will continue to spend

at the anticipated see AP ldvels in support of British farmers. So we

will have those choices. But given that we do currently have, we are a

net contributor to the European Union budget, they would not expect

overall the process the lead in itself to additional fiscal

pressure. The greater risk of fiscal pressure is any incidental dffect of

this process which slows down the growth of the economy, that is what

will deliver the fiscal pressure we need to think about. There `re

various levers that will be between 41 or fall off and negotiathons will

let you find out where thosd going to be. Let's say there is stccess

and you get something that hs essentially the kind of fred trade

arrangements with the EU th`t you want, where does that leave, with

trying to make our own free trade agreements with the rest of the

world? Would it mean we would have to stay in the customs union and

give that