Inflation

Lord Turnbull Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Turnbull (CB)]

My Lords, earlier today, the House confirmed my P45 from membership of the Economic Affairs Committee. I greatly enjoyed working under the chairmanship first of the noble Lord, Lord Hollick, and latterly that of the noble Lord, Lord Forsyth. It was also an exquisite pleasure to note the conversion of the noble Lord, Lord Forsyth, to the cause of social housing and—as we will hear—ultimately to more generosity in the provision of long-term care.

I want to take this opportunity to pay tribute to the work of the late Lord Jenkin of Roding, who had an enduring interest in the quality and integrity of national statistics. He was instrumental in passing the Statistics and Registration Service Act 2007, which brought about important changes to the governance framework. We have already seen some important interventions from the statistics authority where it has identified abuses or distortions; for example, the notorious £350 million claim in the Brexit campaign and its decision to alter the presentation of student loans in the national accounts to give a more accurate picture of the incidence over time of write-offs of debt.

Nevertheless, some significant controversies remain unresolved, some of which, as the House has heard, are of the statistics authority’s own making. Three steps brought them to a head. First, the then Government decided to specify the MPC’s inflation target using the CPI to bring us into line with the rest of Europe. They also explained that the CPI was running about 0.5% a year slower than the RPI. The switch allowed the Chancellor of the Exchequer to claim that he was targeting lower inflation without the Bank having to do much tightening. It also allowed him to tell Tony Blair, who was like the impatient boy in the back of the car and was disappointed that the five tests did not support entry into the euro, that we were getting nearer.

At that stage, the change was confined to the realm of monetary policy. The next event was around 2010, when the ONS made the now notorious change to the way in which clothing prices were collected, which had the immediate impact of widening the gap by another 0.3%. The ONS reviewed that outcome but surprisingly decided to do nothing about it. However, the statistics authority—I emphasise that it was the statistics authority; the noble Lord, Lord Lea, tried to claim that it was the Treasury or the Bank—then declared that the RPI was a very poor measure of inflation that did not have the potential to be developed into a good one. It would therefore go on publishing the RPI but no longer designate it as a “National Statistic”.

[Lord Lea of Crondall]

My Lords, although I attributed possible motive to the Bank and the Treasury, I said that my main concern was the lack of authority to put this adjective in front of it to say that it was discredited. On what basis can officials brief the press that the RPI is discredited?

[Lord Turnbull]

The basis on which that was done was that the statistics authority said it was flawed; that, I thought, was sufficient. Anyway, it said it would go on publishing the RPI and no longer designate it as a “national statistic” but rather, treat it as a legacy measure, with no further work to develop it. The chief statistician said there were many flaws with the RPI. For example, if it is used in the Carli index, which is a very simple test, if something goes up by 25% and then down by 25%, it does not end up where it started—the so-called time reversibility test. It said that it was not worth changing the treatment of clothing if it was not going to look at all the other issues.

This policy of spartan neglect proved controversial, provoking the inquiry by the EAC. Our conclusion was that RPI was deeply embedded in many aspects of economic life—on this we agreed with the noble Lord, Lord Lea—and it was wrong of the statistics authority and the ONS to just walk away from it. Indeed, it was argued that the statistics authority had a statutory duty—

[Lord Reid of Cardowan (Lab)]

Will the noble Lord explain something to me? I do not understand his contention that one of the main reasons why RPI is discredited is that if something goes up by 25% and then comes down by 25%, it does not end up where it started. If any figure goes up by 25% and is then reduced by 25%, it does not end up where it started.

[Lord Turnbull]

I think the noble Lord should go away and write this down on a piece of paper—I think he will find that it does not end up where it started.

[Noble Lords]

That is what he said.

[Lord Turnbull]

I said it does not. In other words, it fails the time reversibility test. If it goes up by 25% and then comes down by 25%, it ought to end up where it was before, but the price level is not the same. We believe that if the ONS is going to continue publishing the RPI, it should have a programme for addressing the flaws that have been identified.

The EAC then looked into the implications of having two rival price indices. It quickly became apparent that the Chancellor had spotted the opportunities for index shopping, as others have noted. The view of the committee was that it would be better to move towards a single index combining the best characteristics of both indices: neither on its own is superior in all aspects. There should be a rolling programme of improvements, starting with the clothing issue.

One area which will need to be addressed is the treatment of housing costs. Here, in my view, neither index has yet found an ideal treatment. The CPI takes no account of owner-occupier housing costs other than repairs. The RPI includes mortgage interest, but of the 27 million households there are only 10 million owner-occupier mortgages. The ONS seems to favour creating a housing element based on rental equivalence, but the rental market is very distorted. Clearly, there is some difficult technical work to be done to find the best solution, which can then be adopted by both indices, and as other differences are resolved a single general measure of inflation can emerge.

The final issue we addressed was the indexation of gilts. Holders of these gilts have benefited substantially from the changes, probably wrongly, which boosted the RPI. There is a clause in the prospectus of early issues that says that if a change is proposed which is materially detrimental, it can be made only with the agreement of the Chancellor. I began to wonder what fool came up with this “heads I win, tails you lose” arrangement, which allows gilt holders to keep any windfall gains but not suffer any correction when things went against them. Then I began to wonder whether it was me, many years ago when I worked on monetary policy in the Treasury.

What to do next? Above all, we should not act precipitously but should give plenty of warning of our intentions. If, as recommended, a unified price index emerges, it should be applied to all indexed gilts issued. In the meantime, we recommended beginning the process of issuing CPI-indexed gilts. We were not convinced that issuing gilts with a different uprating formula would seriously fragment the market. For years, gilts have been issued with different coupons, maturities and tax treatments, and the market is big enough and flexible enough to find equivalent values for them. For existing gilts with maturities after 2030, the prospectus allows them to be linked to an index,

“which continues the function of being an officially recognised index measuring changes in the level of UK retail prices”.

In other words, if the change proposed represents the best professional advice, that index should be used and there should be no veto if it comes out better or worse than the previous index. I have never quite understood why the change in respect of clothing, which was regarded as technical when it happened, is now possibly being regarded as a fundamental change as it is reversed.

It would be nice to close on an upbeat note—that all these problems are being addressed under a new team—but I understand that the search for a successor to the retiring National Statistician has proved fruitless and that the deputy has been asked to act as an interim. That is not a good sign.

The new “Big Brother” Clock, which I regard as, basically, an electronic version of the noble Countess, Lady Mar, is probably telling me it is time to wind up.

Intergenerational Fairness in Government Policy

Lord Turnbull Excerpts

Thursday 26th October 2017 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I very much welcome this debate, which brings intergenerational fairness—a subject previously confined to the higher realms of philosophy and welfare economics—to the forefront of current government policies. It seems that a new division in society is not class, around which the two main parties have been organised for nearly a century, but around age. We may deplore that fact, but I do not think that we can ignore it.

It may seem difficult to believe that younger generations will not be better off than their predecessors when they will enjoy the enormous benefits of science and technology—the genome, the internet and mobile phones. But getting an Uber in three minutes may be scant consolation when you cannot find a home that you can afford to buy or rent. There are many benefits that the young will almost certainly not see: such as free university education, although it was only available to a small fraction of the cohort; defined benefit pension schemes; retirement at 60 or 65; a foot on the housing ladder by their mid-20s and mortgage paid off by 55; and wages more or less guaranteed to rise faster than prices. So it is right to examine the current state of policies through the lens of intergenerational fairness.

Much of the Government’s rhetoric has been spent on government borrowing and debt, but is that really the main problem? Fifteen years ago, the debt to GDP ratio was about 40%. Now it is close to 80%, although it is beginning to decline, and that has been described by successive Chancellors as impoverishing future generations. In my view, this argument is exaggerated. The debt to GDP ratio is a poor metric for fairness. It ignores the decline in the cost of servicing debt. While the ratio has doubled, debt servicing, which was 2.4% 20 years ago, is still 2.4%. Secondly and more importantly, the ratio ignores the asset side of the balance sheet. If government borrowing is reflected in productive investment—for example, housing—the net wealth of the nation may well be increased.

So I put higher up my list of issues a decade of quantitative easing. Its effect is to lower interest rates and boost asset prices, the benefit of which goes mostly to those who own assets, be it land, commercial property, houses or shares, and these are overwhelmingly older people. The other beneficiaries are company executives, who are paid—unlike most of us—partly in cash and partly in shares.

We also need to be precise about terms. Inequality of incomes has not widened in the past 25 years—post tax and benefits, it has stayed virtually the same. It is the widening inequality in wealth that I think is a greater worry, and it is that to which we should address remedies.

Next on my list is pensions. There are virtually no new entrants to DB schemes, some of which are being converted to direct contribution schemes, which then struggle to earn decent returns. Nevertheless, there is still a large number of DB liabilities to be met, and the lower returns are causing huge deficits in company pension schemes, which they have to plug by reducing investment, raising prices or increasing contributions, all to the detriment of younger generations. Meanwhile, free prescriptions are still available from age 60, and the triple lock on pensions has entrenched the position of the elderly.

I do not need to say much about housing, important as it is. We have had two good debates in this House, one only last week, so I have just two comments. The Government’s White Paper confessed that, for those on the housing ladder, the average house “earned” in capital appreciation more than the average earnings of those living in it. While earnings are heavily taxed, those capital gains are not, and inheritance tax is being eased. We need action on all fronts and for all tenures, with less emphasis placed on Help to Buy and more on building affordable homes for rent, which is the epicentre of the housing crisis.

The funding of higher education also raises issues of who should pay. The system that we now have has some important principles at its heart: those who earn more as a result of acquiring a degree should make a contribution and not rely on the taxes of people many of whom will be poorer than they are; contributions should be assessed on future earnings and not on what parents were earning at the time; the funding framework should enable the Government to draw back from detailed control of numbers and courses; and, importantly, students from poorer backgrounds should have better access to higher education. What we have at the moment is a mess. It is misrepresented as a loans scheme, which makes it look more frightening than it really is. The interest rate is indefensible—it is funny how HMG always choose which of RPI or CPI suits them best for any particular circumstance. The scheme has become almost incomprehensible after many changes, and the freezing of the income threshold with retrospective effect was a disgrace. In short, a scheme that has some sound and justifiable principles behind it has been undermined by Treasury greed and opportunism in exploiting the way in which the Government’s accounts are put together. There needs to be a review, but I hope that it will correct the injustices but not be panicked into throwing out what is sound.

Then there is the issue of long-term care. We were edging towards a sensible definition of care and a fair balance between what is paid by the family and what is paid by taxpayers generally. We were also looking at what level of assets should be protected and what assets should be taken into account. In my view, it is right that the family house should be included in wealth, particularly when there is a scheme to provide deferral of payment. The Conservative Party manifesto blew this consensus wide open by knocking out a crucial element; that is, the protection given to the small number of families who incur massive bills for care. This is an issue not of intergenerational fairness but of intragenerational fairness, but it nevertheless needs to be addressed. We need to go back to the drawing board and to take the courage to get past the taunts of “dementia tax”.

Finally, there is an issue right here in this House. Many people would welcome the opportunity to serve here, so my final question is: is it fair that, once appointed, some people can serve 20 years, 30 years or 40 years, thereby reducing the opportunity to generations behind them?