10/09/2016 BBC Parliament on BBC Two


10/09/2016

Chancellor of the exchequer, Philip Hammond MP, giving evidence for the first time in his new role to the Lords Economic Affairs Committee. From Thursday 8th September.


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Transcript


LineFromTo

Well Chancellor, can I welcome you to the House

:00:00.:00:20.

Congratulations on your appointment and I hope you've got over your jet

:00:21.:00:30.

I gather you want to make a few opening remarks?

:00:31.:00:34.

Well, I just, with your permission, wanted to make a brief statement,

:00:35.:00:40.

if I may, to take advantage of the fact that I am in Parliament,

:00:41.:00:44.

to inform Parliament that I have decided to give my first

:00:45.:00:49.

Autumn Statement to Parliament on the 23rd of November 2016.

:00:50.:00:57.

The Autumn Statement will set out the Government's economic and fiscal

:00:58.:01:01.

plans, based on the latest forecasts from the Office for Budget

:01:02.:01:04.

In the run-up to the Autumn Statement, I will be engaging

:01:05.:01:10.

with Britain's business leaders, employee representatives,

:01:11.:01:11.

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

:01:12.:01:15.

and of course, I will engage with Parliamentary colleagues.

:01:16.:01:17.

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

:01:18.:01:26.

will of course be relevant to the Autumn Statement,

:01:27.:01:31.

and we are very keen to hear your thinking

:01:32.:01:33.

and your general approach to some of the key issues.

:01:34.:01:38.

Perhaps I can start off though with housing,

:01:39.:01:40.

which as you know we published a report on housing just

:01:41.:01:43.

Our conclusion was that in order to meet demand,

:01:44.:01:49.

catch up on unmet demand, and also to moderate house price

:01:50.:01:54.

rises and make house prices over time more affordable to young people

:01:55.:01:58.

who are seeking to buy homes, we would need to build 300,000 homes

:01:59.:02:03.

a year, which is about 50% above the government's current target.

:02:04.:02:11.

In order to achieve that, local authorities would have to play

:02:12.:02:14.

And there would need to be a shift of emphasis away from houses

:02:15.:02:22.

for sale to social housing, to meet a larger need in that area.

:02:23.:02:28.

And we would very much welcome your thoughts

:02:29.:02:30.

on those conclusions, and in particular, what arrangements

:02:31.:02:35.

you could contemplate to enable local authorities to take advantage

:02:36.:02:41.

of the historically low long-term interest rates, to invest in social

:02:42.:02:45.

housing in partnership with the private sector

:02:46.:02:47.

Which of course would generate income, over a considerable

:02:48.:03:00.

I welcome the central recommendation of your report,

:03:01.:03:03.

which is that we need to increase housing supply.

:03:04.:03:07.

The government is committed to increasing house-building.

:03:08.:03:13.

It won't surprise you to know that this is an area

:03:14.:03:16.

Both because it goes to the heart of the Prime Minister's agenda

:03:17.:03:24.

of creating an economy that works for everybody.

:03:25.:03:33.

Too few people are able to get onto the housing ladder,

:03:34.:03:38.

and too few people are able to access

:03:39.:03:40.

appropriate housing, whether by purchase or for rent.

:03:41.:03:42.

There are a number of aspects to that problem.

:03:43.:03:49.

It is also, of course, a macro economic problem.

:03:50.:03:52.

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

:03:53.:03:56.

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

:03:57.:04:01.

In due course, we will announce how we intend to proceed.

:04:02.:04:06.

But I can confirm that we share the committee's analysis,

:04:07.:04:10.

that there needs to be an increase in the rate of house building.

:04:11.:04:17.

We want to see a diversity of tenure types available, and we will bring

:04:18.:04:21.

forward policy announcements in due course.

:04:22.:04:27.

That's all I can really say at the moment.

:04:28.:04:29.

Do you share our recommendation and enthusiasm for local authorities

:04:30.:04:32.

to resume their historic role and play a significant part?

:04:33.:04:35.

And if so, how would they finance that?

:04:36.:04:41.

Because the housing revenue account has some rather curious limits

:04:42.:04:45.

and the way it enables local authorities to build swimming pools,

:04:46.:04:48.

apparently any number of swimming pools, but not build houses,

:04:49.:04:51.

which seems to be a rather perverse outcome of the current rules.

:04:52.:04:59.

There is head room in existing housing revenue account authorities.

:05:00.:05:05.

There is, I'm told, ?3.4 billion of borrowing headroom

:05:06.:05:08.

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

:05:09.:05:18.

limits that was announced in AS13 and was undersubscribed.

:05:19.:05:20.

I'm not convinced it is lack of access to borrowing

:05:21.:05:23.

that is preventing local authorities from building.

:05:24.:05:26.

We will certainly look at local authorities,

:05:27.:05:32.

registered social landlords, and the private sector,

:05:33.:05:38.

and indeed, the corporate sector, as being potentially parties who can

:05:39.:05:41.

play a part in dealing with the country's overall housing needs.

:05:42.:05:48.

But I think we all know that this is not primarily

:05:49.:05:52.

It's a land availability challenge that we have to address in order

:05:53.:06:00.

to bring down house prices to affordable levels,

:06:01.:06:02.

Well, that wasn't the evidence that we heard.

:06:03.:06:14.

There is a large number of permission homes granted every

:06:15.:06:17.

A great deal of public land which could be pressed into service

:06:18.:06:22.

to be building houses was very slow in becoming available.

:06:23.:06:27.

So again, there is a role for the government there.

:06:28.:06:30.

We felt the Treasury with its new infrastructure

:06:31.:06:33.

commission, would be able to play a role of driving

:06:34.:06:36.

The Housing Implementation Task Force, which oversees the release

:06:37.:06:41.

of public sector land, is attended by the Chief Secretary.

:06:42.:06:46.

I have some experience of this from my days as Secretary

:06:47.:06:49.

of State for Defence, the biggest release of land

:06:50.:06:57.

The challenge is that many of the sites that government

:06:58.:07:06.

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

:07:07.:07:09.

RAF airfields perhaps, quite a long way from

:07:10.:07:11.

They may over time deliver very large numbers of housing units,

:07:12.:07:15.

but they will require very large amounts of infrastructure

:07:16.:07:20.

and inevitably, need phased development.

:07:21.:07:22.

If I could also make a couple of observations,

:07:23.:07:26.

one of the challenges in addressing the discrepancy between planning

:07:27.:07:32.

permissions granted and planning permissions built is the tendency

:07:33.:07:35.

of local authorities, and I completely understand why

:07:36.:07:39.

they find it convenient to do so, to meet their housing needs

:07:40.:07:42.

by releasing a small number of very large sites,

:07:43.:07:46.

often sites that need very significant infrastructure

:07:47.:07:48.

Inevitably, that leads to a lack of competition in local markets

:07:49.:07:58.

because you have effectively a monopoly supplier controlling

:07:59.:08:00.

And the other point is that there is not any such thing

:08:01.:08:08.

Housing markets are highly local, and there is overall a mismatch

:08:09.:08:14.

between where the planning permissions are being granted

:08:15.:08:17.

and where the hotspots of demand exist.

:08:18.:08:21.

The reality is that we have to address some very challenging

:08:22.:08:28.

questions of how we deliver increased housing availability

:08:29.:08:32.

in the areas where the high levels of housing demand exist.

:08:33.:08:38.

As you go through your consultation process for the Autumn Statement,

:08:39.:08:44.

I would humbly suggest you should consider discussing this with local

:08:45.:08:50.

authorities, who show a great deal of enthusiasm to get building.

:08:51.:08:55.

They obviously have a great deal of local knowledge but they don't

:08:56.:08:59.

have the finance to do it, and feel that is a pressing pressure

:09:00.:09:03.

that they want the Treasury to address.

:09:04.:09:12.

Chancellor, I want to start by asking you what you said

:09:13.:09:27.

about resetting economic policy.

:09:28.:09:28.

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

:09:29.:09:31.

policy can do and what fiscal policy can do.

:09:32.:09:33.

In particular, do you accept that monetary policy has possibly

:09:34.:09:36.

run its course in this country and probably in Europe as well,

:09:37.:09:39.

and that as interest rates come near zero or below zero in some

:09:40.:09:43.

cases, if you really want to put money into the economy,

:09:44.:09:46.

then it's fiscal policy that is likely

:09:47.:09:48.

I wonder if I can just draw you on where you stand

:09:49.:09:57.

The comment I made was that we would have an opportunity

:09:58.:10:01.

By which I was referring to the fact that the Prime Minister has made

:10:02.:10:11.

clear that we will no longer be seeking

:10:12.:10:16.

to reach a fiscal surplus in 2019-2020.

:10:17.:10:20.

Clearly, we need to put a new fiscal framework in place to guide policy

:10:21.:10:24.

Clearly, monetary policy is the remit of the Bank of England,

:10:25.:10:29.

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

:10:30.:10:33.

responsibility and independence in this area.

:10:34.:10:43.

The governor has made it quite clear that he thinks he does

:10:44.:10:46.

have further ammunition in the bank's locker.

:10:47.:10:50.

Not only in terms of rate reduction, but in terms

:10:51.:10:53.

I think that monetary policy can and should operate alongside fiscal

:10:54.:11:03.

The bank was the first mover, if you like, after the shock

:11:04.:11:09.

to the economy of the referendum exit vote.

:11:10.:11:13.

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

:11:14.:11:17.

whether a fiscal response is appropriate, alongside that

:11:18.:11:19.

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

:11:20.:11:31.

I appreciate the point you made about a reset.

:11:32.:11:34.

The government was never going to hit that particular target,

:11:35.:11:36.

I just want to draw you on the fiscal aspect.

:11:37.:11:49.

I am not asking you to say what you will do.

:11:50.:11:52.

Would you be prepared, or do you think it would be right

:11:53.:11:55.

that if we are wanting to put more money into the economy to get

:11:56.:11:59.

the economy going and put the inflation rate up,

:12:00.:12:02.

it's more likely than not it is fiscal policy that will do it,

:12:03.:12:05.

rather than what is left in the monetary policy locker?

:12:06.:12:09.

I would certainly agree that fiscal policy can play a role.

:12:10.:12:16.

In relation to fiscal policy, do you believe that you should be

:12:17.:12:19.

looking at infrastructure projects, targeting tax measures on those

:12:20.:12:30.

who will spend the money, rather than those who will save it.

:12:31.:12:33.

If there is a need at any time to deliver a fiscal stimulus

:12:34.:12:37.

for broader reasons, it has to be well designed.

:12:38.:12:39.

It has to be limited in duration, quick in delivering effect,

:12:40.:12:42.

and given our overall fiscal position, which is still unhealthy,

:12:43.:12:45.

ideally, it will be contributing to the long-term investment needs

:12:46.:12:50.

of the country, contributing to the challenge of raising

:12:51.:12:52.

And therefore, I would hope that in designing a fiscal stimulus,

:12:53.:13:13.

any sensible Chancellor would seek to do as much as possible

:13:14.:13:16.

through investment, that will not only deliver short-term demand

:13:17.:20:33.

about the Bank of England's predictions which were included

:20:34.:20:41.

We were told we would have higher interest rates, technical recession

:20:42.:20:47.

recessions, and employment would go up and House prices would fall.

:20:48.:20:50.

Are you not concerned that the whole question about Q E,

:20:51.:21:01.

that you made clear this morning, now resides

:21:02.:21:04.

which is having a real impact, as Lord Lamont has suggested.

:21:05.:21:08.

I looked at the numbers, and if you look at the House price

:21:09.:21:17.

to earnings ratio from the last quarter of 2012 to the last quarter

:21:18.:21:28.

of 2015, it has increased by 4.2 times to 6.9 times

:21:29.:21:43.

and in Greater London, 5.9 times to 6.12 times.

:21:44.:21:45.

Are you not concerned that Q E is resulting,

:21:46.:22:02.

the latest tranche of Q E will need to be put into final

:22:03.:22:06.

That huge vacuum of money which is based on artificially low

:22:07.:22:09.

interest rates, which would otherwise be invested in jobs

:22:10.:22:12.

and creating a growth in the economy.

:22:13.:22:15.

Have we not actually got to the stage where the bank

:22:16.:22:18.

is effectively running economic policy in a way,

:22:19.:22:21.

which is to the disadvantage to the Government's declared

:22:22.:22:24.

objective to make wider homeownership available,

:22:25.:22:27.

and also enable wealth to be spread more equally,

:22:28.:22:36.

when it's actually taking wealth away from, if I can use

:22:37.:22:39.

the phrase, ordinary, hard-working people,

:22:40.:22:46.

to people who have substantial assets.

:22:47.:22:55.

As Chancellor, shouldn't you get a grip on it?

:22:56.:23:07.

It is the case that Q E is built upon the principle of causing asset

:23:08.:23:11.

I think we could have a long debate about what is happening

:23:12.:23:15.

I have no doubt that in the end, it's about supply,

:23:16.:23:20.

If the supply of land for housing is increased,

:23:21.:23:23.

no amount of monetary inflation is going to force prices to rise

:23:24.:23:26.

The situation we have got in the UK has been,

:23:27.:23:33.

increasing money supply, and very constrained resource

:23:34.:23:46.

Obviously, creating an artificial asset price for inflation.

:23:47.:23:53.

On the wider point, the monetary policy committee obviously has

:23:54.:23:56.

responsibility for monetary policy decisions.

:23:57.:23:57.

But as we've already rehearsed, the governor does require

:23:58.:24:05.

the consent of the Treasury for unconventional monetary stimulus.

:24:06.:24:18.

They can't do it without the Treasury's agreement.

:24:19.:24:30.

I think it would be wrong to characterise this as the bank

:24:31.:24:34.

I was responding to the point you made that you

:24:35.:24:39.

I don't want to comment publicly on a matter

:24:40.:24:42.

which is a responsibility of the monetary policy committee.

:24:43.:24:45.

But I draw attention again that there are no steps of positive

:24:46.:24:49.

easing that the bank can take, without seeking the approval

:24:50.:24:51.

Just on the housing point, finally, and I take your point

:24:52.:25:01.

As you say, it is very complicated, but if the house price to earnings

:25:02.:25:12.

ratio has doubled in three years, in London, that can't just be

:25:13.:25:16.

There are other factors involved here, and similarly,

:25:17.:25:21.

could you address the point about the pension funds?

:25:22.:25:27.

For example, would you consider extending the period,

:25:28.:25:30.

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

:25:31.:25:34.

Would you consider extending that period, given that we are in

:25:35.:25:42.

a highly than usual period and interest rates

:25:43.:25:45.

yes, I am sorry. I should have answered that question.

:25:46.:25:55.

I did ask the question myself, what has been the impact on funded

:25:56.:26:00.

And the response that I have received,

:26:01.:26:09.

the advice I have received, is that the additional underfunding

:26:10.:26:12.

is not thought likely to give rise to any

:26:13.:26:14.

That there are no pressures for action coming from anywhere

:26:15.:26:28.

because of the fact that this is something that needs to be

:26:29.:26:32.

It doesn't require immediate action, and in the context of the overall

:26:33.:26:37.

pension deficit, it is not a step change.

:26:38.:26:40.

It is also the case that corporations collectively

:26:41.:26:43.

have a very substantial amount of cash

:26:44.:26:45.

in their balance sheets, and so I would challenge the notion

:26:46.:26:58.

that every pound required to close the pension fund deficit is a pound

:26:59.:27:02.

snatched away from investment in productive capacity.

:27:03.:27:11.

It is taken away from cash and balance sheets very often.

:27:12.:27:18.

You talked about that being a role for both fiscal

:27:19.:27:21.

And of course for much of the 1980s, the way this tended to be put

:27:22.:27:26.

was wanting to have a fiscal policy that supported monetary policy.

:27:27.:27:29.

In those days, the job was to get inflation down.

:27:30.:27:32.

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

:27:33.:27:37.

Is it not therefore the case, given where we are,

:27:38.:27:40.

that monetary policy does need some support?

:27:41.:27:44.

I mean interest rates must be very close to the limit.

:27:45.:27:47.

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

:27:48.:27:50.

Instead of thinking about this as being two policy instruments,

:27:51.:28:00.

is it not the case that monetary policy really does now

:28:01.:28:02.

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

:28:03.:28:09.

First of all, the difference in the 1980s was that we did both

:28:10.:28:17.

monetary and fiscal policy at the time.

:28:18.:28:29.

As to your point about the turnaround in inflation,

:28:30.:28:33.

it is important that the Bank of England's inflation target

:28:34.:28:38.

We see inflation too low as being as damaging

:28:39.:28:47.

to the economy in the long term as inflation too high.

:28:48.:28:49.

I can only repeat what the governor has said.

:28:50.:28:52.

He has said that there is further capacity,

:28:53.:28:54.

the bank has further capacity in all three areas.

:28:55.:28:57.

That it has used as levers of monetary policy,

:28:58.:29:02.

that the bank's view of the floor limit on interest rates

:29:03.:29:05.

is a number which is positive, but very close to zero.

:29:06.:29:09.

And therefore, there is more that the Bank believes it can

:29:10.:29:13.

We also clearly, depending on the fiscal rules that we set,

:29:14.:29:28.

can create at Autumn Statement, headroom for fiscal stimulus,

:29:29.:29:31.

if we believe it is appropriate to do so.

:29:32.:29:36.

Indeed, we can create headroom for fiscal stimulus

:29:37.:29:39.

whether we decide that fiscal stimulus is appropriate

:29:40.:29:41.

It would be perfectly possible to design a set of fiscal rules that

:29:42.:29:48.

provides headroom, without necessarily using that

:29:49.:29:51.

Could I press on one aspect of this, in the sense of very

:29:52.:30:04.

Obviously you can't say much more about fiscal policy at this stage,

:30:05.:30:08.

given that we have the Autumn Statement.

:30:09.:30:10.

But do you have any response to the general idea put forward

:30:11.:30:15.

at a time when interest rates are as low as they are,

:30:16.:30:19.

that really the government should avoid this pursuit of off-balance

:30:20.:30:21.

sheet funding which it is tried on a number of occasions,

:30:22.:30:25.

using private finance to do what our public sector projects,

:30:26.:30:32.

and often in more expensive ways than could be done

:30:33.:30:35.

And is this not a time when we should be saying,

:30:36.:30:39.

well, the government is in a very strong position of being able

:30:40.:30:46.

to borrow on its own account and it should not

:30:47.:30:49.

be looking far and wide for various schemes to really lay off

:30:50.:30:52.

the problem about public sector debt measures?

:30:53.:30:57.

I think, in terms of low borrowing costs, and the choice

:30:58.:31:06.

between publicly funded and privately funded...

:31:07.:31:18.

public sector projects, I am talking about.

:31:19.:31:21.

Is never going to revolve around the relative cost of finance

:31:22.:31:27.

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

:31:28.:31:29.

than the private sector's cost of finance.

:31:30.:31:31.

In well-designed off-balance sheet projects, the real worry

:31:32.:31:34.

is transferring risk to the private sector partner.

:31:35.:31:36.

And although there are in theory, ways of transferring some elements

:31:37.:31:39.

of that risk to a private sector contractor partner,

:31:40.:31:41.

for example, while financing on balance sheet, the reality

:31:42.:31:44.

is if you are financing on balance sheet, the risk always bounces back

:31:45.:31:47.

So I think, for me, it's always been the case and remains the case

:31:48.:31:56.

that the argument for off-balance sheet financing has to be

:31:57.:32:00.

constructed around the transfer of risk rather than simply

:32:01.:32:04.

the losing of the inconvenience of the debt going

:32:05.:32:07.

We were looking recently at an issue of the student loan book

:32:08.:32:19.

and the question of the sale of that.

:32:20.:32:22.

And we struggled very hard to see where the risk transfer

:32:23.:32:25.

was that was taking place in this area.

:32:26.:32:27.

And very much thought this seemed to be an approach

:32:28.:32:29.

that was being designed almost entirely to keep

:32:30.:32:32.

Well, I mean the government has a certain borrowing capacity.

:32:33.:32:41.

PSN D as a percentage of GDP is not an irrelevant number.

:32:42.:32:45.

Our policy has been and will remain that where assets in the government

:32:46.:32:48.

balance sheet serve no policy purpose, they should be disposed

:32:49.:32:51.

of in order to create headroom for policy driving investment.

:32:52.:32:58.

And in the case of the student loan book, the policy is achieved

:32:59.:33:05.

without the need to have the asset sitting on the balance sheets

:33:06.:33:16.

by the government, underwriting effectively the expected default

:33:17.:33:18.

rate, the expected non-repayment element of the student loan book.

:33:19.:33:21.

So I think the policy intention to dispose of the student loan book

:33:22.:33:25.

Obviously, the timing of that decision will be subject

:33:26.:33:29.

Just a quick question on the housing market, Chancellor.

:33:30.:33:45.

You believe it is a question of supply and demand.

:33:46.:33:48.

Do you think the government schemes for effectively subsidising

:33:49.:33:53.

homeownership, skew the market in a way that's not helpful?

:33:54.:34:03.

Well, the current range of schemes we have in place is certainly

:34:04.:34:06.

designed specifically to support homeownership.

:34:07.:34:11.

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

:34:12.:34:14.

So in a sense, government policy is responding to the desires

:34:15.:34:18.

and the aspirations of the electorate.

:34:19.:34:23.

But we also know, don't we, that although 90% of people may

:34:24.:34:29.

aspire to own a home, in reality, far less than 90%

:34:30.:34:35.

of people will actually be able to own a home?

:34:36.:34:39.

And it is important that we have a range of tenure types

:34:40.:34:43.

which reflects the reality of the world, not just aspirations.

:34:44.:34:48.

I'm very keen to see structures like shared ownership and rent

:34:49.:34:51.

to buy playing an appropriate role in our overall housing market mix.

:34:52.:34:56.

Would you agree that subsidising homeownership does inflate prices?

:34:57.:35:04.

If you are referring to the starter home scheme,

:35:05.:35:12.

as I understand the detail of the scheme, the homes that

:35:13.:35:25.

will be delivered on a site, effectively displace what would have

:35:26.:35:29.

been affordable homes delivered in another way perhaps,

:35:30.:35:31.

affordable homes for rent, by focusing the subsidy

:35:32.:35:33.

that is already implicit in the obligations developers

:35:34.:35:35.

receive through section 106 agreements and so forth.

:35:36.:35:38.

To focus them on delivering homes for ownership.

:35:39.:35:40.

Help to buy similarly, helping people to get

:35:41.:35:47.

onto the housing ladder is a conscious bias in favour

:35:48.:35:49.

of ownership, reflecting the aspiration of 90%

:35:50.:35:51.

As I said, we are looking in the round at housing

:35:52.:36:08.

These are very complicated areas and we will announce any policy

:36:09.:36:11.

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

:36:12.:36:21.

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

:36:22.:36:25.

or are you looking at the possibility that surplus itself

:36:26.:36:30.

isn't necessarily the right end point for a society which has

:36:31.:36:34.

poor infrastructure, can borrow at virtually no cost

:36:35.:36:37.

at all, and has plenty of people willing to lend to the government?

:36:38.:36:45.

And you said that the PSND needs to be brought down.

:36:46.:36:59.

It can be brought, PSND, as a proportion of GDP,

:37:00.:37:03.

it can be brought down without actually getting as far

:37:04.:37:10.

as surplus, it can be done by having a borrowing requirement 2% or 3%

:37:11.:37:14.

But you do not need to go all the way to generating a surplus

:37:15.:37:20.

in order to achieve a decline in the debt GDP ratio.

:37:21.:37:23.

If you have a borrowing requirement of 2-3% of GDP, unless you have

:37:24.:37:26.

a consistent GDP growth rate above that level, your PSND

:37:27.:37:29.

will not be going down, it will be going up.

:37:30.:37:32.

I would suggest that the level of PSND as a ratio of GDP

:37:33.:37:35.

that we are at at the moment, we are getting quite

:37:36.:37:38.

to the level that might make a difference to the willingness

:37:39.:37:41.

I don't think we should be cavalier about the levels of debt.

:37:42.:37:46.

Perhaps I can help the noble lord by reminding him of what the Prime

:37:47.:37:52.

Minister said at PMQs on the 20th of July,

:37:53.:37:56.

she said: "We have not abandoned the intention to move

:37:57.:38:00.

What I have said is we will not target that at the end

:38:01.:38:06.

That is what I think is possibly a mistake,

:38:07.:38:09.

Can I make one other point on the question of housing

:38:10.:38:13.

If you are trying to get another 50,000 people over the line

:38:14.:38:18.

into homeownership, but the supply of houses by private sector builders

:38:19.:38:26.

does not increase, the only way that is resolved is that you get

:38:27.:38:31.

50,000 people in, and house prices rise in order to discourage

:38:32.:38:34.

a different 50,000 from getting on the ladder.

:38:35.:38:38.

So this is an issue, housing supply increases at the same

:38:39.:38:41.

time, this is a self defeating prophecy.

:38:42.:38:49.

Well, I have already said I completely agree

:38:50.:38:51.

with the committee's analysis that we need to significantly

:38:52.:38:53.

increase house-building rates in this country.

:38:54.:38:55.

And there are many challenges to doing that.

:38:56.:39:00.

There's a planning challenge, a capacity challenge

:39:01.:39:01.

But it's very clear that this is one of the factors.

:39:02.:39:11.

If you're looking to answer the question, why does the UK

:39:12.:39:15.

economy perform differently from other

:39:16.:39:19.

comparable economies, particularly in productivity

:39:20.:39:21.

performance, it seems logical to me to look at ways in which the UK

:39:22.:39:25.

economy functions differently from other comparable economies.

:39:26.:39:30.

The way our housing market functions is very clearly,

:39:31.:39:33.

very different from the way the housing market

:39:34.:39:37.

functions in France, Germany, the Netherlands,

:39:38.:39:38.

And I think we should probably seek to draw lessons from that.

:39:39.:40:02.

I want to put this question, when you said 90% of people aspire

:40:03.:40:06.

I wonder whether you would expect that to change in the light

:40:07.:40:10.

of a prolonged period of low inflation.

:40:11.:40:15.

As you are aware, the propensity to homeownership does vary very

:40:16.:40:18.

considerably amongst Western European economies.

:40:19.:40:19.

It is a broad generalisation, those that have endured or suffered

:40:20.:40:22.

bouts of high inflation in the period since the Second World

:40:23.:40:25.

War, tend to have a high propensity for homeownership,

:40:26.:40:32.

whereas those who have not suffered in that way,

:40:33.:40:36.

such as Germany and the Netherlands, which you've mentioned,

:40:37.:40:38.

tend to have a low propensity to homeownership.

:40:39.:40:46.

Now for much of the lifetime of people around this table,

:40:47.:40:49.

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

:40:50.:40:52.

incentive to own your own home through the mortgage arrangements.

:40:53.:40:55.

Now we have had some period of low inflation,

:40:56.:41:03.

and we might have a good deal more judging

:41:04.:41:05.

I wondered whether in the light of that, you would expect

:41:06.:41:11.

the propensity to home ownership to revert to the sort of levels

:41:12.:41:15.

it is in some other countries and was indeed in this country,

:41:16.:41:18.

I don't think there is any evidence that the aspiration

:41:19.:41:35.

of years when we have had low inflation.

:41:36.:41:51.

But clearly, when you buy a house, you are doing two things.

:41:52.:41:56.

You are purchasing a place to live and using it as a place to live

:41:57.:42:00.

and making an investment, which has historically turned out

:42:01.:42:03.

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

:42:04.:42:08.

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

:42:09.:42:11.

independent of the investment performance of the asset.

:42:12.:42:13.

It will be partly motivated by the likely return

:42:14.:42:16.

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

:42:17.:42:24.

a tax privileged class of investment, it is

:42:25.:42:26.

It depends, arguably, the removal of schedule a taxation

:42:27.:42:43.

greatly enhanced the tax advantages of owner occupation.

:42:44.:42:46.

It is still a hugely privileged asset class.

:42:47.:42:49.

And of course, people will also be influenced by alternative

:42:50.:42:52.

I don't suppose the noble lord goes in pubs.

:42:53.:43:07.

You will hear people saying, I do not put money in a pension,

:43:08.:43:12.

People look at the after-tax attractiveness of different asset

:43:13.:43:19.

classes, when they are looking at the propensity

:43:20.:43:21.

The people I meet in pubs are looking for somewhere rent.

:43:22.:43:31.

It is getting more and more difficult.

:43:32.:43:33.

It depends on the class of pop you go to.

:43:34.:43:38.

Going back to the scepticism about whether the borrowing rules

:43:39.:43:47.

on local authorities are a real constraint,

:43:48.:43:51.

the local authorities gave us evidence that suggests

:43:52.:43:54.

they strongly thought it was a constraint.

:43:55.:43:56.

If you don't think it is a constraint, then what would you do

:43:57.:43:59.

in the important Autumn Statement, to ensure that local authorities

:44:00.:44:02.

Because it is clear, if you look at foreign examples

:44:03.:44:11.

like France, or our own past history, that the one

:44:12.:44:14.

thing that has gone badly wrong in this country is that

:44:15.:44:17.

while the private sector is still building roughly the same

:44:18.:44:20.

number of houses, Housing Associations and local authorities

:44:21.:44:26.

are not, and I wonder if one is the crack the supply problem,

:44:27.:44:30.

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

:44:31.:44:37.

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

:44:38.:44:41.

But I recognise the challenge and I have said already,

:44:42.:44:44.

that local authorities, social landlords, corporates,

:44:45.:44:46.

private house-builders, they all have to be part

:44:47.:44:48.

I have already noted down the point about local authority borrowing

:44:49.:44:58.

constraints, and I have not met with the LGA,

:44:59.:45:01.

but I will take that question forward.

:45:02.:45:02.

The hard evidence, which is the available borrowing

:45:03.:45:13.

capacity in housing revenue account authorities,

:45:14.:45:15.

suggests that maybe borrowing is not a constraint.

:45:16.:45:17.

You have suggested that it is, and I will take that up

:45:18.:45:20.

There are bits of it here and there with

:45:21.:45:26.

I accept that and it would be important to understand how many

:45:27.:45:33.

authorities there were chafing at the bit to build houses,

:45:34.:45:36.

Just coming back to well-designed off-balance sheet transactions.

:45:37.:45:46.

Focusing for a moment on Hinkley Point, which seems to be

:45:47.:45:50.

being financed to generate a mere 10% return, probably twice the level

:45:51.:45:55.

of return expected by infrastructure investors, and the tab

:45:56.:45:57.

is being picked up for the next 35 years by the electricity

:45:58.:46:00.

In terms of transferring risk, it is one thing to transfer risk

:46:01.:46:05.

to a corporate entity or a partnership where

:46:06.:46:16.

you are confident that they are going to be able to deliver

:46:17.:46:19.

the goods, but there seems to be many questions

:46:20.:46:24.

hanging over whether in fact Hinkley Point could ever be

:46:25.:46:28.

delivered, so surely it has failed the test of being a well designed

:46:29.:46:31.

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

:46:32.:46:35.

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

:46:36.:46:39.

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

:46:40.:46:41.

I was talking specifically about the transfer of risk

:46:42.:46:47.

I believe the return, the assumed return

:46:48.:46:53.

But what one has to remember is that this project,

:46:54.:47:00.

as proposed, delivers something that has never been delivered by a civil

:47:01.:47:05.

nuclear project anywhere in the world.

:47:06.:47:08.

It transfers the design construction and operation risk entirely

:47:09.:47:17.

Now there is a very hefty insurance premium in there.

:47:18.:47:24.

And that is why the rate of return may look high.

:47:25.:47:33.

But if the project doesn't generate electricity,

:47:34.:47:35.

it will never generate a penny of return.

:47:36.:47:39.

If it generates late, that will be a penalty suffered

:47:40.:47:45.

by the investor, the provider, not by the taxpayer or energy consumer.

:47:46.:47:51.

And indeed, the way the project is structured, there is a penalty

:47:52.:47:54.

for late delivery in the price structure.

:47:55.:47:57.

So not only do they suffer a deferred return on their capital

:47:58.:48:15.

investment, but they will suffer a lower price if the project

:48:16.:48:17.

So I think it does meet the criteria for a well-designed

:48:18.:48:21.

In an area where risk has never been effectively transferred

:48:22.:48:25.

from the buyer to the seller before.

:48:26.:48:26.

As part of the making the economy work for everyone,

:48:27.:48:30.

the government has said that they are going to have a strong

:48:31.:48:33.

And so I would like to explore with you how much

:48:34.:48:58.

that is a change from what was pursued under

:48:59.:49:00.

And if I may, I can divide that into two.

:49:01.:49:04.

The money aspect, which I think lands well and truly

:49:05.:49:06.

in your department, and there is perhaps a broader brush

:49:07.:49:09.

policy issue in terms of, what does that mean for policy change?

:49:10.:49:12.

Have you any comments and information on that?

:49:13.:49:14.

First of all, the industrial strategy is a new departure.

:49:15.:49:17.

The Department for Business Enterprise and the other thing...

:49:18.:49:33.

The department that has changed its name more than any other

:49:34.:49:38.

department in history is currently working up a strategy.

:49:39.:49:45.

The Treasury is obviously involved, but it is the lead innovation

:49:46.:49:48.

Department for enterprise and innovation schools.

:49:49.:49:49.

And in due course, there will be a consultation document published.

:49:50.:49:56.

But the underlying focus is that this economy,

:49:57.:50:00.

although it has done some remarkable things over the last years,

:50:01.:50:05.

it has delivered 2.7 million new jobs, a remarkable achievement,

:50:06.:50:08.

especially when compared with the performance

:50:09.:50:09.

in some of our principal competitors in Europe.

:50:10.:50:14.

What it has not delivered is growing productivity.

:50:15.:50:20.

And what we most urgently need now to focus on is growing

:50:21.:50:25.

the productivity performance of the economy, in order to support

:50:26.:50:28.

rising real wages and rising living standards.

:50:29.:50:35.

There is no other sustainable way to deliver rising living standards

:50:36.:50:42.

on a sustained basis than growing productivity.

:50:43.:50:50.

And we consider that a more active approach to industry is required,

:50:51.:50:54.

Including looking at the remarkable disparity between productivity

:50:55.:51:02.

performance in London and the South East, and the other

:51:03.:51:05.

Including observing that unlike many competitor countries,

:51:06.:51:16.

our secondary cities have very considerably poorer productivity

:51:17.:51:22.

And by addressing those disparities, it is not that the UK

:51:23.:51:28.

economy does not know how to deliver productivity.

:51:29.:51:31.

London and the South East are as productive as any region

:51:32.:51:34.

But we have not worked out how to spread that productivity

:51:35.:51:39.

performance more evenly across the economy.

:51:40.:51:43.

And that is the key challenge that we need to address.

:51:44.:51:51.

So it is a bit like the Northern Powerhouse type of thing?

:51:52.:52:00.

The Northern Powerhouse project is a project which seeks

:52:01.:52:03.

to harvest the benefits of agglomeration.

:52:04.:52:07.

It observes that there four great Northern cities,

:52:08.:52:10.

which are close enough together, given enhanced

:52:11.:52:17.

transport links and they have pretty poor transport links between them

:52:18.:52:20.

at the moment, to create a single Labour market, a single goods

:52:21.:52:24.

Economic theory tells us we should expect to see a transformation

:52:25.:52:28.

in productivity performance of that agglomerated economy.

:52:29.:52:30.

So that is the principle behind Northern Powerhouse.

:52:31.:52:38.

But there are other focuses around the country, which are equally

:52:39.:52:41.

susceptible to support, to achieve higher productivity performance.

:52:42.:52:46.

I think the statistic is that if we were able to spread,

:52:47.:52:54.

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

:52:55.:53:00.

of London and the South East, and the rest of England,

:53:01.:53:03.

we would increase GDP by ?300 billion.

:53:04.:53:08.

That's a remarkable figure and a remarkable potential for us

:53:09.:53:11.

Chancellor, given what you have said about the lack of productivity,

:53:12.:53:20.

the lack of connectivity between those four cities,

:53:21.:53:32.

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

:53:33.:53:36.

It is important to do both and my predecessor made clear

:53:37.:53:43.

the government wants to press ahead with the East-West route.

:53:44.:53:46.

And in fact, a sum of money, I cannot remember if it was ?50

:53:47.:53:56.

million, ?80 million, that was made available

:53:57.:53:58.

So, you would expect them to go forward simultaneously?

:53:59.:54:02.

HS2 is a long-term project, it will take a decade

:54:03.:54:05.

HS2, I suspect that the West Pennine railway may be a shorter duration

:54:06.:54:14.

project, although I am not an expert.

:54:15.:54:16.

We do not have a validated plan for it yet.

:54:17.:54:20.

If I could go back onto the policy aspect, does that mean

:54:21.:54:23.

that the industrial strategy would not be looking at things such

:54:24.:54:26.

And whether sometimes, certain companies shouldn't be

:54:27.:54:41.

taken over because one can't actually deliver,

:54:42.:54:44.

or the companies that take them over cannot deliver

:54:45.:54:46.

on many of the promises that they make at the point of takeover?

:54:47.:54:51.

Well, we have a much more robust system for securing commitments

:54:52.:54:54.

We have applied that system in relation to the recent takeover

:54:55.:55:09.

by Softbank, where those commitments are made in a form

:55:10.:55:36.

are enforceable through the takeover panel.

:55:37.:55:38.

I am not going to set out in detail what the industrial strategy

:55:39.:55:41.

is going to include, the Prime Minister has made it clear

:55:42.:55:44.

that while we welcome investment from overseas in the UK,

:55:45.:55:47.

and indeed we need investment from overseas

:55:48.:55:51.

in the UK, we are interested in investment that will grow

:55:52.:55:54.

We are not interested in asset strippers coming in and buying up

:55:55.:55:58.

And I think you can anticipate that that view will be expressed

:55:59.:56:03.

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

:56:04.:56:07.

you might be prepared to find more money for things

:56:08.:56:10.

like the British Business Bank, and also, would you be extending

:56:11.:56:13.

the sort of guarantees that are envisaged under Brexit

:56:14.:56:16.

to funding channels, currently coming in through the IB

:56:17.:56:18.

First of all, the British Business Bank is already delivering

:56:19.:56:25.

and supporting over ?7.5 billion of investment,

:56:26.:56:27.

So it is doing a significant job already.

:56:28.:56:34.

The lending from EIB, we will watch very carefully.

:56:35.:56:40.

Britain remains a full member of the European Union,

:56:41.:56:50.

and we expect that projects from the UK will be

:56:51.:56:52.

treated absolutely on their merits, and the UK historically,

:56:53.:56:55.

because we deliver strong projects, has done disproportionately well

:56:56.:56:57.

We expect that EIB funding to UK projects will continue right up

:56:58.:57:05.

to the point of departure from the European Union.

:57:06.:57:09.

And obviously as part of the process of exiting the EU,

:57:10.:57:13.

we will have to put in place appropriate alternative arrangements

:57:14.:57:19.

for not just EIB, but for every, but for everything for which we are

:57:20.:57:25.

currently dependent upon an EU structure or institution.

:57:26.:57:50.

I am delighted you raised the European Union.

:57:51.:57:52.

I wanted to talk to you about Brexit.

:57:53.:57:54.

I didn't want to ask you what it means.

:57:55.:57:57.

You can ask me what it means if you like!

:57:58.:57:59.

I think I know the answer to that one.

:58:00.:58:02.

I want to ask you what you would like it to mean.

:58:03.:58:05.

Mr Davies told the House of Commons on Monday that it was very

:58:06.:58:09.

improbable that the United Kingdom could remain in the single market,

:58:10.:58:12.

and Lord Lawson told Times readers last week that it was highly

:58:13.:58:15.

undesirable to remain in the single market.

:58:16.:58:17.

The aim should be to get out as soon as possible,

:58:18.:58:20.

and deregulate much further and faster.

:58:21.:58:21.

You told the BBA in July that it was in the interest

:58:22.:58:25.

of the UK and the other member states to keep things

:58:26.:58:28.

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

:58:29.:58:35.

agree with Lord Lawson, and you yourself would

:58:36.:58:37.

like for financial services to see us remain in or as close

:58:38.:58:40.

to the single market as possible, am I right?

:58:41.:58:49.

First of all, I should make clear that you're quoting my remark

:58:50.:58:58.

at the BBA which was on the evening of the 12th of July,

:58:59.:59:02.

the day before I was appointed to this role, so I was speaking

:59:03.:59:05.

as Foreign Secretary rather as Chancellor of the Exchequer.

:59:06.:59:08.

I certainly got a smaller office as a consequence

:59:09.:59:11.

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

:59:12.:59:22.

as if there is only pre-existing model.

:59:23.:59:28.

And we have to use the pre-existing models and language.

:59:29.:59:30.

The UK is not Norway, it's not Switzerland,

:59:31.:59:33.

We are the world's fifth-largest economy.

:59:34.:59:35.

The arrangements that we negotiate with the European Union

:59:36.:59:43.

I have no doubt whatsoever about that.

:59:44.:59:49.

The point I was making to the BBA is that there are very good reasons

:59:50.:59:53.

to think that it is in the interests of the overall economies

:59:54.:59:57.

of the European Union countries, as well as the UK economy

:59:58.:00:03.

London, as Europe's financial centre, remains broadly as it is.

:00:04.:00:07.

I know it's probably become quite fashionable among public opinion

:00:08.:00:12.

to think that banks mainly exist to trade with themselves,

:00:13.:00:15.

They exist to support the real economy.

:00:16.:00:21.

The financial services market is there essentially to support

:00:22.:00:24.

London's financial services market supports the real economy

:00:25.:00:28.

across Europe, and not just in the UK.

:00:29.:00:31.

German car manufacturers, Italian manufacturers of consumer

:00:32.:00:38.

white goods, use the City of London to deliver finance and financial

:00:39.:00:41.

services, and I believe that the structures that we have

:00:42.:00:46.

in London, very complex ecosystem of banks, funds,

:00:47.:00:50.

insurance companies, law firms, business services firms,

:00:51.:00:53.

would not and could not be replicated anywhere else.

:00:54.:01:00.

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

:01:01.:01:07.

very narrow and hypothetical national advantage, would be a huge

:01:08.:01:10.

mistake for any of our European Union partners to follow.

:01:11.:01:17.

I genuinely believe that London delivers not only for the UK,

:01:18.:01:20.

but for the European Union as a whole.

:01:21.:01:25.

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