(13 years, 2 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (Justine Greening)
I beg to move, That the Bill be now read a Second time.
Fiscal responsibility is the overriding priority of this Government. In May, within 24 hours of taking office, we published a coalition agreement setting out our agenda for government. Fiscal responsibility was the very first item on the very first page of that agreement. It read:
“deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain.”
Let me remind the House why we chose that as our priority. We inherited the largest budget deficit in our peacetime history, we inherited a budget deficit forecast to be the largest in the G20, and we inherited the largest structural deficit in the whole of Europe. We simply could not ignore the mountain of debt that was casting a shadow over our economy and our people, so we set ourselves an ambitious task—to bring order back to the nation’s finances. The Bill aims to do exactly that.
Mr Mark Field (Cities of London and Westminster) (Con)
Will the Minister add one more criterion to her list—that a moral case needs to be made for ensuring that we do not pass on to future generations the debts that have been racked up for the consumption of the generations alive today?
Justine Greening
I agree absolutely. Far too often we fail to make the point that the penalty for not dealing with the deficit today will be to hand on even bigger debts to our children tomorrow. They will not thank us, and should not thank us, if we fail to address the urgent crisis that we have come into government to tackle.
Before I get into the detail, I would like to set out again the Government’s broader fiscal objectives. This coalition Government believe that fiscal policy should ensure that the national finances are sustainable. As I have just said, sustainable public finances mean that future generations will not need to pay for the services enjoyed by all of us today. Sustainable public finances mean that the economy can expand and grow without the fear of tax hikes and spending cuts in the future. Sustainable public finances also mean that monetary policy can operate effectively and stabilise the economy, when needed. With that in mind, we have taken decisive action since taking office.
In May, we had immediate reductions to in-year spending, which bought us much-needed breathing space in the sovereign debt storm raging across Europe. The emergency Budget in June was the moment when fiscal credibility was restored. At the Budget, my right hon. Friend the Chancellor set out the Government’s fiscal mandate. Our first goal within the mandate is to balance the structural current deficit by the end of a rolling five-year forecast period.
Mr William Cash (Stone) (Con)
My hon. Friend may remember that before the election, a number of us took grave exception to the fact that the then Government were not telling the truth about the full extent of the debt. Will she give us an assurance that this Government will tell the truth to the British people, in line with the National Audit Office and Sir Michael Scholar, so that they know what the Budget deficit really is?
Justine Greening
My hon. Friend makes an excellent point. The way to provide that guarantee and certainty is to pass the Bill before us today, which sets up the Office for Budget Responsibility—but does so, critically, as an independent organisation that will make its own forecasts. In so doing, it will contribute to being independent of Governments and provide credible official forecasts for the first time in our country. That will give us the certainty we need. I will come on to explain later how we ended up needing official forecasts to be done independently, referring to the problems that had arose prior to this Parliament.
Mr Edward Leigh (Gainsborough) (Con)
The Government have a serious political difficulty, to which the Justice Secretary referred over the weekend, giving rise to a considerable amount of publicity. All over the country, local authorities are loading cuts on to front-line services, yet we read today that scores of local authority executives earn more than the Prime Minister. What is the Minister’s message to local authorities? Will she insist that they deliver real efficiency savings to avoid these cuts in front-line services, which are so politically damaging?
Mr Deputy Speaker (Mr Nigel Evans)
Order. I would be grateful if the Minister answered that question in relation to the Bill before the House.
Justine Greening
No doubt my hon. Friend will be encouraged to learn of our belief that our efforts to cut back-office costs and protect front-line services in Whitehall should be replicated in town halls.
Key to understanding progress against the Government’s fiscal mandate are strong, credible, independently conducted official forecasts. Our first goal is to balance the structural current deficit by the end of a rolling five-year forecast period; our second is to see the public sector debt ratio fall at a fixed date in 2015-16. The measures that we set out in the Budget, along with the departmental allocations that we set out in the spending review, constitute a four-year plan to meet that fiscal mandate. We are currently on track to meet the mandate one year early, in 2014-15.
Kate Green (Stretford and Urmston) (Lab)
I understand the Government’s objective to reduce public debt over a fixed period, but what flexibility does the Minister feel needs to be built into the system to take account of unexpected economic circumstances and shocks?
Justine Greening
I have just defined that flexibility. Although we want to balance the structural current deficit by the end of the rolling five-year forecast period, we are, as I have said, on track to meet the mandate one year early. We are clearly ensuring that we will achieve our overall objectives. By the end of the current Parliament we will have completely eliminated the structural current deficit, and the debt ratio will be falling. That is our four-year plan for restoring order and stability to our nation’s finances, which has been praised by the international community and welcomed by the financial markets.
Sajid Javid (Bromsgrove) (Con)
The Minister refers to praise from the international community. If she was referring to the International Monetary Fund, I welcome that praise. She will also be aware that the IMF’s independent evaluation office reported last week that it had felt intimidated and bullied by the Treasury in which the current shadow Chancellor, the right hon. Member for Morley and Outwood (Ed Balls), and the Leader of the Opposition played a key role between 2004 and 2006, and that it had been forced to water down its criticism of United Kingdom fiscal policy. Will she reassure the House that, as the IMF has praised this Government’s plans for the OBR, it seems that we did not intimidate it as the last Government did?
Justine Greening
I hope that we will have an altogether more constructive relationship with the IMF. In fact, it has already commented on the background to the need for this Bill. In November last year, it stated that the recent crisis led the UK to suspend its two national fiscal rules—the golden rule and the sustainable investment rule—at the end of 2008, and that the credibility of the national rules as effective constraints of policy action was weakened well before the crisis. It went on to say that the rules failed to prevent a worsening of the fiscal balance in the years leading up to the crisis, leaving insufficient buffers as the economy entered the downturn, and that while in place the golden rule was often criticised becauseit provided insufficient monitoring, transparency and accountability of fiscal policy. That was the IMF’s assessment of the previous fiscal mandate, and I think that it demonstrates clearly why it was so ineffective in tackling the problems that our country experienced. In many respects, it provided the ground on which those problems were able to prosper and grow.
Claire Perry (Devizes) (Con)
Does the Minister agree that the problem when the Treasury sets rules of that kind is that such rules can be broken, manipulated and “gamed” for entirely political reasons? Following the establishment of the OBR, for the first time we will have a Treasury that focuses on real control of the public finances and value for money for the taxpayer, rather than a policy-making, press release-driven organisation.
Justine Greening
My hon. Friend makes an excellent point. We cannot allow the Treasury to be judge and jury. That was the problem under the last Government. The Institute for Fiscal Studies said recently:
“If an OBR had been in existence over recent years it might have discouraged Gordon Brown from persevering with fiscal forecasts that most independent analysts thought over-optimistic from 2002 onwards.”
We believe that the OBR can have a real impact on the Government’s financial and fiscal management.
We are clear about the fact that we need to put our country’s public finances back on a sustainable footing. Both the IMF and the OECD went from issuing warnings and cautions about the UK’s economy and public finances to describing the measures introduced by the coalition Government as “essential” and “courageous”. Only a couple of weeks ago the Secretary-General of the OECD urged the British Government to stay the course, and we will. Our bold action has taken Britain out of the financial danger zone, but we must not forget that none of this would have been possible without the crucial first step of increasing the credibility of our fiscal framework. The Bill will put on a statutory footing our reforms of the way in which fiscal policy is conducted in this country.
Let me remind the House of the origins of the Office for Budget Responsibility. Within a week of taking office, we had set up a new independent body to return credibility to official forecasts. Until then, the final decision on official Government forecasts had always been made by the Chancellor and his advisers—one of whom is now shadow Chancellor—rather than by independent experts. Over the past 10 years, the last Government’s forecasts for growth in the economy have been out by an average of £13 billion, and their forecasts of the budget deficit three years ahead have been out by an average of £40 billion. Unsurprisingly, those forecasting errors have almost always been in the wrong direction.
Alec Shelbrooke (Elmet and Rothwell) (Con)
The transparency that the Bill brings to finances is part of an overall package of transparency. My hon. Friend mentioned budgets that have overrun. Does she agree that the Bill will help to prevent Departments from losing control of their budgets in the way that was described recently by a senior civil servant?
Justine Greening
My hon. Friend is right. The fact that, for the first time, official forecasts will be prepared by a body that is independent of the Treasury is critical. It will not only return credibility to the assessment of whether the Government are on course to meet their fiscal mandate, but will make that more likely to happen. I believe that Governments will be reticent about introducing policies that seem to take them off course. There is a clear distinction between the responsibilities involved. The fiscal mandate and the policies will continue to be determined by Ministers. It is not for the OBR to do that; what it must do is assess the economic and fiscal forecasts in the light of those policies, and in the light of their likelihood of meeting the fiscal mandate.
Katy Clark (North Ayrshire and Arran) (Lab)
Does the Minister agree that growth is key to economic recovery, and that the recent negative growth figures have destabilised the Government’s economic policy? Is it not worrying that the OBR has already revised its growth forecast from 2.6% when the Government took power to 2.3% following the emergency Budget, and to 2.1% following the spending review?
Justine Greening
I think that demonstrates the value of the OBR. For the first time we shall have a set of entirely independent forecasts to which Members can refer.
The hon. Lady has strayed on to the detail and implications of the policy, and I think that it is perfectly fair for her to do so. We have always said—I believe that Mervyn King, the Governor of the Bank of England, said the same last year—that the recovery would be choppy. It is not at all unusual for an economy emerging from recession, particularly a recession as long and severe as the one that we have undergone, to experience at least one instance of either flat or negative growth.
I do not want to be called to order, Mr Deputy Speaker, so I shall move on. Let me simply say to the hon. Lady that she has confirmed my point that benefiting from independent forecasts for the first time will be key to holding a good-quality, informed political debate about the Government’s economic policy and how it is progressing, and that the OBR has also said that we are on course to achieve our fiscal mandate.
Mr Peter Bone (Wellingborough) (Con)
Will the Minister clarify something for me? If the OBR says that growth will be x in the next year, must the Chancellor abide by that? Obviously, measures in his Budget may encourage growth: he may cut taxes, for instance.
Justine Greening
The OBR makes an independent fiscal forecast and assessment of the economy. The Treasury may or may not agree with that forecast and assessment, but the point is that it is done entirely independently of the Government. Rightly, however, it will remain the prerogative of Ministers to decide policy. That is the clear distinction we have set out throughout the Bill.
We needed to make sure that we have official forecasts for the economy that the public can trust, even if that means we end up giving away some of our powers as Treasury Ministers. As my right hon. Friend the Chancellor has said, we need to fix the Budget to fit the figures, not fix the figures to fit the Budget. That is why the OBR was established, and the Institute for Fiscal Studies has said it is a “welcome” innovation.
To enable the OBR to get to work immediately, it initially operated on a non-statutory basis. It was headed by Sir Alan Budd, a highly respected fiscal and macro-economic expert in our country. The interim OBR produced an independent assessment of the economy and public finances both ahead of, and at, the Budget in June. We gave it direct control over that forecast, with full access to all the data, assumptions and economic models. It made all the key judgments and decisions underpinning the economic and fiscal forecasts. Great strides were also made in transparency. More information was published than ever before. That fact was noted by both the Treasury Committee and the IFS.
Andrea Leadsom (South Northamptonshire) (Con)
As a member of the Treasury Committee, may I say that it was incredibly valuable to be able to challenge the OBR members who were present and Government Ministers? From our point of view as representatives of Back Benchers, the process was very useful.
Justine Greening
I welcome that helpful intervention. My hon. Friend will no doubt be aware that the Treasury Committee inquiry into the OBR described Sir Alan Budd as an “exemplary” witness. In putting together this Bill, we took on board the Committee’s points, and I am sure my hon. Friend will be happy about the unprecedented role the Committee will play in appointments to the OBR.
The final task of the interim office was to provide advice on how the permanent, statutory OBR should be established. I am happy to report to the House that the Bill is designed in line with the detailed recommendations made by Sir Alan Budd in his letter to my right hon. Friend the Chancellor. We have now moved to permanent arrangements. This Bill enshrines in statute provisions to ensure the OBR’s independence. Robert Chote has been appointed as the OBR’s first permanent chair. His appointment was confirmed by the Treasury Committee. He is supported by Graham Parker and Steven Nickell, whose appointments were also confirmed by the Committee.
The permanent Budget responsibility committee led on the production of the OBR’s economic and fiscal outlook, published in November. In addition, the resources made available to the OBR have been increased. There has been a transfer of technical forecasting capacity from the Treasury to the OBR, and a transparent, multi-year funding settlement has been agreed for the spending review period. The OBR has also moved to a new external location outside the Treasury building.
Let me now turn to the detail of the Bill. We debate this Bill after the constructive scrutiny the other place has given it. The other place welcomed the Bill. Part 1 includes provisions on the new framework for fiscal policy. Clause 1 sets out the need for the Treasury to produce a charter for Budget responsibility setting out the formulation and implementation of fiscal policy. In particular, the charter will set out the Government’s fiscal objectives and the fiscal mandate, and a draft of the charter is available to Members alongside the Bill.
Clause 2 requires the Treasury to produce a Budget document on an annual basis. The detail of exactly what needs to be covered within the annual Budget document is set out in the charter. The Bill also repeals the legislative aspects of previous Governments’ fiscal frameworks, including the Fiscal Responsibility Act 2010, a pointless piece of declaratory legislation that would have made no improvement in fiscal planning, instead merely setting up another set of targets that Ministers would assure us they were going to meet right up until they missed them.
Clause 3 provides for the existence of a statutory body called the Office for Budget Responsibility. Clause 4 sets out the main duty of the OBR, which is to examine and report on the sustainability of the public finances. This is a broad remit, which means that the OBR will not be limited to forecasting alone. At a minimum, the remit of the OBR means it must produce the following: assessments of the likelihood that the Government will meet their fiscal mandate alongside each forecast; a sustainability report at least once a year; a report on the accuracy of its forecasts at least once a year; and full economic and fiscal forecasts at least twice each year. Beyond these tasks, the OBR will be able to undertake any research and analysis pursuant to its remit.
Clause 5 describes how the OBR is to fulfil its duties. Crucially, it includes a set of principles—objectivity, impartiality and transparency—to guide the OBR in fulfilling its remit. It also requires that the OBR must not analyse or develop non-Government policies. Analysis is rightly the domain of the OBR, but, as I have said, policy making is the responsibility of publicly elected Ministers. These principles protect independence. Clauses 5 and 9 also put in place explicit provisions for the OBR to have complete discretion over the way it carries out its statutory duties, giving it full access to the information it requires to do so. The remaining clauses in part 1, as well as schedule 1, set out further detail of the operation and governance of the OBR.
We have sought to reflect the theme of independence in the constitution and governance of the OBR. In line with the recommendation of the International Monetary Fund, the OBR is established with its own legal personality and will operate at arm’s length from Ministers as an executive non-departmental public body. The OBR’s executive functions will be undertaken by a three-person Budget responsibility committee. The members of this committee will be appointed by the Chancellor. To support independence, the Bill makes provision for the Treasury Committee to veto all appointments and dismissals. That statutory veto bestows on the Committee more power than it has over any other public appointment. The Chancellor has said that he is giving the Committee this veto to ensure that there is no doubt that the individuals leading the OBR are independent and have the support and approval of the Committee.
A chairman will lead the BRC and run the OBR. All staff will report to the chair, and that person will control the “hiring and firing” of the staff. The staff will be civil servants, ensuring that the OBR can recruit from the widest possible pool of expertise. There will also be at least two non-executive members, to provide support and challenge to the OBR. The non-execs will report on how the OBR performs its duty. They will also commission expert peer review of the OBR’s forecast and analysis.
The OBR will report directly to Parliament, with its forecasts and reports laid directly in the House, as was the case with the autumn forecast in November 2010. Written questions from Members will be passed to the OBR to respond to, and the members of the BRC will be available for Select Committee scrutiny.
The provisions in part 1 represent a permanent improvement to economic policy making and the transparency of government. Britain is now one of the first advanced economies to have an independent fiscal agency that produces official fiscal and economic forecasts. It is therefore no surprise that these reforms have attracted praise from the IMF, and they put us at the cutting edge of international best practice. I hope that the world will look with interest at our policy innovations.
Part 2 modernises the governance of the National Audit Office. The goal of the NAO is to maintain effective independent oversight of spending. The Bill’s provisions will strengthen the NAO at this critical time of scarce public resources. Members will be aware that very similar provisions were included in the previous Government’s Constitutional Reform and Governance Bill, which passed through this House with cross-party support. However, there was no time for the other place to consider those provisions at the end of the last Parliament, and this Bill represents the earliest opportunity to bring them back before Parliament. The provisions are aimed at implementing the recommendations made by the Public Accounts Commission following its review of NAO corporate governance.
As a result of this Bill, the office of the Comptroller and Auditor General will continue to exist; the CAG will be an independent officer of this House and will be limited to a single 10-year term. The NAO will be established as a new corporate body in its own right. I do not propose to go into great detail on those provisions, given that when they were discussed during the passage of the Constitutional Reform and Governance Bill the then Chairs of both the Public Accounts Commission and the Public Accounts Committee supported them. I also understand that the new Chair of the Public Accounts Committee has indicated that she is content.
In summary, the provisions in this Bill will bring confidence and responsibility back to our country’s fiscal framework, with stronger institutions and improved governance. They are as crucial for the long term as they are for the short term, and I commend the Bill to the House.
Ms Angela Eagle (Wallasey) (Lab)
The Bill makes changes to the responsibilities exercised by the Treasury in fiscal policy making, establishes the interim Office for Budget Responsibility on a permanent statutory footing and modernises the governance arrangements of the National Audit Office. I wish to make it clear at the outset that we support the sensible changes to the governance of the NAO which, as the Minister pointed out, are proposed in parts 2 and 3 of the Bill. We do so not least because they were our reforms. As she was good enough to observe, we set them out in the Constitutional Reform and Governance Bill towards the end of the previous Parliament. As someone who has served three times as a member of the Public Accounts Committee—once in opposition, once in government and once as a Treasury Minister—I am glad to see the reforms getting on to the statute book, despite the extra obstacle presented by the intervention of a general election. I also wish to thank the Minister and the Government for the open mind that they showed to Labour amendments during the passage of the Bill in the Lords. I hope that she will show a similar approach to the amendments that we will table in Committee.
The creation of the OBR seeks to apply to one narrow part of the UK’s fiscal institutions some of the autonomy that Labour brought to monetary policy when we made the Bank of England independent—of course, we took steps to make the Office for National Statistics independent too. As the House of Commons Library has pointed out, there are examples of similar bodies in other countries. Austria, Belgium, Canada, Denmark, Hungary, Holland, Slovenia, Sweden and the USA all have some arrangements for independence in forecasting and analysis of the national fiscal situation.
The reform was initially sold by the Chancellor, with much fanfare, as one that would take the politics out of economic forecasting. In doing that, he gave the entirely false implication that previous Ministers had somehow been instructing hapless officials in the Treasury to produce incorrect but politically convenient forecasts. The reality is that the previous Government published a range for gross domestic product growth, and in all the years before the crash on only two occasions did growth fall below the range that the Treasury published. In the other years, the figure fell either within the range or above it, thus showing that we were exercising caution. We were not fiddling the figures. That level of accuracy is about all that any of us can expect from economic forecasting, which is a notoriously unreliable art rather than an objective science. Let me share a quote with the House:
“Economic forecasting, by its very nature, is subject to uncertainty. Our judgement is that, at this stage of the economic cycle, the outlook is even more uncertain than usual.”
That was the OBR’s comment on its forecasts in June 2010.
However, I have found evidence of one occasion when a Chancellor overruled the Government’s forecasters, and the House may be interested to hear about it. In 1996, the then Chancellor, who is now the Secretary of State for Justice, was reported to have increased the growth forecast from 2.5% to 3% in order to make way for pre-election tax cuts. The chief forecaster he overruled was, by some odd coincidence, Sir Alan Budd, the curiously short-lived first head of the interim OBR.
Matthew Hancock (West Suffolk) (Con)
I am sure that the hon. Lady was not about to move on from talking about forecasts having spoken only about growth forecasts, not about the previous Government’s dreadful record on fiscal and deficit forecasts.
Ms Eagle
The important thing to note about forecasts, particularly those on the tax take, is that it is difficult to be accurate with them. When I served on the Treasury Committee prior to becoming a Treasury Minister, there was comment on how accurately the Treasury was able to forecast the tax take. Clearly, it is more art than science, so the House would be mistaken to believe that because something has been forecast, it is automatically an objective certainty. Those of us who deal with these issues, on both sides of the House, know that forecasting the economy can be as uncertain as forecasting the weather—Michael Fish found out how uncertain that can be one night. Forecasts are what they are; they can sometimes be wrong and sometimes they can be accurate. I honestly think that, in general—I am not making a party political point—the Treasury has a reasonably good record on forecasting.
Jacob Rees-Mogg (North East Somerset) (Con)
I entirely agree with the hon. Lady on the difficulty of forecasting, as even the best economic forecasters get it wrong, but I wonder whether she was as shocked as I was to read in the Financial Times about the bullying of the International Monetary Fund by the Treasury and the Financial Services Authority. Was that not a pretty disgraceful way to behave?
Mr Deputy Speaker (Mr Lindsay Hoyle)
Order. We are in danger of going off into past subjects. The hon. Lady may be tempted to answer, but we have to deal with the Bill before us and not with speculation in a newspaper about bullying. I think that we will stick to the Bill.
Ms Eagle
Thank you, Mr Deputy Speaker.
Let me be the first to say that the Opposition support an independent OBR, so long as it is indeed independent. In that respect, the OBR has some ground to make up and some points to prove after its very difficult start in life. Initially it was located a few doors down from the Chancellor in the Treasury and consisted entirely of Treasury civil servants. Its much vaunted “independence” was utterly compromised in June last year when it was unwisely bounced into the politically convenient early publication of employment forecasts, suspiciously just ahead of Prime Minister’s Question Time—the Minister did not refer to that incident. The forecasts themselves turned out to be controversial and the OBR ended up looking more like an offshoot of the propaganda machine inside Conservative central office than an independent and trusted forecasting organisation. Sir Alan Budd, the interim head of the OBR, announced his shock departure shortly afterwards. We may well have to wait until he writes his memoirs to find out exactly what really happened.
Andrea Leadsom
The hon. Lady may be aware from reading the Treasury Committee’s report on the original independence of the interim OBR that colleagues on her own side quizzed Sir Alan Budd and others very closely on that point. The Committee’s report makes it very clear that there was nothing to answer, that the OBR had indeed acted independently and that it had not been in hock to the Government.
Ms Eagle
Nevertheless, independence has to be perceived to be there too. No matter what individuals behind the scenes know, part of consistency and the whole point of such independence is that it is accepted across the political spectrum and in the country as a whole. If that is not the case, the organisation does not have the credibility that the reform creating it sought to establish. That is why I look to Robert Chote, who has moved out lock, stock and barrel from the Treasury, to begin to establish that reputation.
Justine Greening
It is only right that I should put on record the comments of Sir Alan Budd, in his report on the progress of the interim OBR, on the issues that the hon. Lady has raised—budget forecasts and interference. On the fact that some Treasury officials perform both roles of giving advice to the Chancellor and helping the OBR to produce the forecasts, he clearly said in paragraph 31:
“We do not believe that this involved any conflict of interest.”
In relation to how the OBR should operate and the issuing of forecasts, he said in paragraph 44:
“We are also able to state, without reservation, that there was no ministerial involvement in the forecasts at any stage.”
The hon. Lady uses Alan Budd as an example of someone who was somehow manipulated, but does she accept that his comments do not bear that out? Perhaps she would like to withdraw her comments.
Ms Eagle
This concerns those who allowed the bringing forward of estimates of job losses caused by the Government’s decisions on fiscal consolidation, which happened to be published just ahead of a Prime Minister’s Question Time at which that was to be a point at issue. Clearly, the relevant people should have realised the effect that that coincidence would have on the OBR’s reputation for independence when it had only just been set up.
On the Minister’s point about whether the OBR should use Treasury forecasters, Lars Calmfors, the chair of the Swedish fiscal policy council, has contrasted the arrangements in the Bill with those in Sweden. He said that it is very difficult when the OBR is working very closely with Treasury civil servants and other forecasters:
“one cannot have it both ways—the OBR cannot be both an independent watchdog and an in-house provider of input into the Treasury’s work.”
We shall certainly want to explore in greater depth in Committee that aspect of the arrangements for our OBR, which differs from the Swedish arrangements.
In addition to concerns about independence, we want to raise in Committee issues of the OBR’s accountability to Parliament. We wish to explore how independent the OBR will really be, given that close co-operation with the Treasury will be needed to access the information to generate the forecast in the first place. There is also the issue of its budget—I accept the comments that the Minister made about the transparent five-year budgeting process, but there are examples of similar bodies in other countries having had their budget cut as a result of displeasing the Government with whom they were working. The governance arrangements will need further scrutiny, as will issues of accountability, not just in relation to the Treasury Committee veto on appointments, but regarding the OBR’s accountability to Parliament.
Although the Bill is about who makes forecasts, the reality is that independent forecasting is no substitute for sound Budget judgements. The Government will not be judged on the accuracy of their forecasts, but they will be held to account for the consequences of the choices they have made in the circumstances they were confronted with and the forecast that the OBR had given them. Our dispute is with the Government’s plans and choices, not with the independence of their forecasting machinery.
When we left office, unemployment was falling, growth was forecast to be 2.3% this year, inflation was lower than it is now and was falling and, according to the OBR, borrowing had come in at £20 billion lower than had been forecast in 2009. When the previous Government delivered their last Budget in March 2010, UK growth was faster than in Germany, Italy and the eurozone as a whole, but the current Chancellor has chosen to prioritise rapid deficit reduction over any other policy goal and he has slammed the brakes on growth. Without an electoral mandate, the Government have chosen to launch a risky experiment with our economy and our prosperity.
Justine Greening
I completely disagree with much of what the hon. Lady says, not least given that her Government left unemployment 400,000 higher. She mentions electoral mandate, but surely she does not think that the previous Prime Minister had one, because he was never voted in as Prime Minister.
Ms Eagle
We do not have a presidential system: we have a prime ministerial system and the leader of the governing party tends to be asked by Her Majesty the Queen to form the Government. That is what has always happened, and if the Minister wishes to change that, perhaps we need to take an even wider look at our constitutional arrangements than that planned by the Deputy Prime Minister.
Mr Mark Field
Although the hon. Lady makes a fair point about explicit mandates, it is surely also the case that there was absolutely no explicit mandate for any of the actions taken by the erstwhile Government after 2008, given the situation that we found ourselves in.
Mr Deputy Speaker (Mr Lindsay Hoyle)
Order. We are getting tempted once again. If Members stick to the Bill, that will be helpful.
Ms Eagle
There is a difference between having an economic policy that is put into place directly after a general election, when manifestos said one thing and the Government did another, and responding to a crisis that very few people saw coming and that threatened the entire infrastructure of the global banking system. There are obviously differences between those situations, but I respect the hon. Gentleman’s expertise in financial matters, particularly regarding the City.
The Government have chosen to cut public expenditure faster and deeper than any other country in the industrialised world except Iceland and Ireland. They have chosen to announce the deepest cuts in public spending in the UK since the second world war. Nine months into the life of this Government there is still no sign of any plan for jobs and growth, but sensible people know that without a plan for jobs and growth it will not be possible to get the deficit down as the OBR predicts it should come down. Meanwhile, the cuts are beginning to bite and the OBR has forecast that more than 330,000 public sector jobs will be lost. Some 10,000 police jobs have been announced as going so far, and there are reports that 250 Sure Start centres will close. Unemployment, which had begun to fall, is now rising again and inflation, which was low and falling when we left office, is now rising. All that is before the effects of the Government’s ill-advised decision to increase VAT. Growth has stalled.
Mr Deputy Speaker
Order. Hon. Members have been tempting us away from the Bill, but I am sure that the hon. Lady wants to stick to it. We do not want to be tempted through further interventions, so if she will keep to the Bill, that will be helpful.
Matthew Hancock
I enjoy debating with the hon. Lady, so I am extremely grateful to her for giving way. She has just prayed in aid the OBR, saying that it had forecast that the deficit would fall, but she has also said that under the Government’s plan the deficit will not fall. The OBR’s forecast is based on the Government’s plan, so does she agree with herself or not?
Ms Eagle
This is how we can get into difficulty with forecasts, which are static when they are made but apply to a dynamic situation. The hon. Gentleman knows, for example, that our debates in the House are, in part, about the effects on growth of a drastic fiscal consolidation. Our contention has always been that cutting too far too fast will suppress growth to such an extent that the deficit reductions that were hoped for will not come about. That is an essential part of the economic debate that, as far as I can see, we have been having since the Budget in June last year.
Forecasts can be affected by subsequent events and by Government policies. That demonstrates that what matters most is not forecasting for its own sake, but the judgment of the Chancellor of the Exchequer and the Government, and the extreme fiscal choices that they have made.
Alison McGovern (Wirral South) (Lab)
Does my hon. Friend agree that we have another independent forecaster, the Bank of England, which was made independent in 1997? What lessons from the interaction between the Treasury and that independent forecaster ought to be applied to the relationship between the Treasury and the OBR?
Ms Eagle
In order to fulfil its duties, the Bank of England produces its own forecasts, which do not always agree with what were previously Treasury forecasts and will now be OBR forecasts. There are also a number of independent forecasters out there with their own view of the situation. Forecasts range from optimistic to pessimistic, and those of us who watch these things learn to take account of that. Regarding OBR forecasts or forecasts of the Bank of England as statements of the unvarnished truth will quickly get us into difficulty.
Andrea Leadsom
I am grateful to the hon. Lady for giving way again. On a point of clarification, the issue of multiple forecasts came up in the Treasury Committee review, and it was made clear that the OBR takes the Bank of England’s monetary forecasts on interest rates and uses them as its own for its fiscal forecast, so there is no duplication or overlap. One is forecasting the state of interest rates and the other is stating the fiscal forecast.
Ms Eagle
Yes, but the Bank of England will also forecast for its own use growth and other aspects which it needs to assess in formulating monetary policy.
OBR forecasts predict that by the end of this Parliament, 110,000 more people will be on the dole under the Government’s plans, compared with our previous plans. Under Labour, the economy was forecast to grow by 2.6%, compared with only 2.1% under the current Government’s plans. The consumer prices index would have been at 1.6%, rather than 2.8%. So the OBR has decided that there would have been higher growth, more jobs and lower inflation under Labour.
Justine Greening
May I ask the hon. Lady a straightforward question? The Office for Budget Responsibility assesses that we have a greater than 50% likelihood of hitting our fiscal mandate, which is to eliminate the structural deficit by 2014-15 and achieve our broader fiscal mandate on debt ratio. Does she welcome that or not?
Ms Eagle
It is important to see what the forecasts are and what they mean at this stage of economic recovery. Of course I want to see the economy recover and grow, unemployment coming down and inflation being controlled. Unfortunately, that is not what the signs that we have been picking up since the Government’s decision to cut so deep and so fast tell us about the real economy. We will see as time goes on how the OBR adjusts its forecasts to take account of the monthly and quarterly statistics from the Office for National Statistics.
The shock GDP figures before Christmas strongly imply that the Chancellor will suffer the embarrassment of his growth forecasts being downgraded by the OBR in his self-proclaimed Budget for growth, which is due to be unveiled next month. We will wait and see.
We on the Labour Benches support a genuinely independent OBR but, as I said, we will explore in Committee the practical extent of that independence and suggest amendments to the Bill to shore it up a little more. We will need to explore the viability of the arrangements to produce, rather than comment on, the fiscal forecasts, as many other fiscal councils do. We will need to explore the extent of the OBR’s remit and whether the close co-operation with civil servants required to produce the forecast will lead to behind-the-scenes negotiations that will compromise at least the perception of independence.
Let us be under no illusion that the existence of the OBR, which we support in principle, can in any way protect us from the misjudgments of the present Chancellor or any other. The OBR must assume, as the Minister said, that the Government’s plans are a given. It cannot comment on the fiscal mandate or on wider fiscal policy in general. It is prevented from doing so. All it can do is calculate the probability of the Government being able to achieve their stated plans. The OBR therefore cannot protect the country from the mistakes that the Chancellor makes, or from the mistakes that he has made already. It is no panacea and it should not be regarded as one. Our dispute—
Mr Mark Field (Cities of London and Westminster) (Con)
Thank you, Mr Deputy Speaker, for calling me so early in the debate. As you know, I have to attend a constituency engagement for which, unbelievably, I am not well enough attired, for it is a black-tie dinner in the City of London. [Hon. Members: “Ah!”] I am supposed to be protected from that lot, Mr Deputy Speaker, so do your level best, please. I apologise that I shall not be here for all the winding-up speeches.
Listening in the House to Budgets and autumn statements over much of the past decade has been, at times, a somewhat surreal experience. Year after year the erstwhile Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), rattled out cascading figures for growth and public deficit reduction. As the hon. Member for Wallasey (Ms Eagle) rightly pointed out, the growth figures proved, at least until the middle of the previous decade, to be uncannily accurate, even often defying so-called expert opinion. However, the deficit numbers were always hopelessly, devastatingly inaccurate.
Almost comically, although this can scarcely be regarded as a laughing matter, every single Budget between 2001 and 2007 forecast that the public finances would move back into surplus in about three or four years. As time wore on, the debt and annual deficit rose inexorably as the Treasury employed smoke and mirrors to conjure the illusion of fiscal stability.
Matthew Hancock
The hon. Member for Wallasey (Ms Eagle) cast aspersions on the ability of my right hon. and learned Friend the Member for Rushcliffe (Mr Clarke), now the Justice Secretary, to forecast, saying that in 1996 he forecast more than 2.5% growth. Information has reached me that in 1997 growth was more than 3%, so it turns out that he was right. What does my hon. Friend make of that?
Mr Field
My hon. Friend makes an extremely good point. In the one case in which the hon. Member for Wallasey (Ms Eagle) tried to argue that there had somehow been untoward behaviour by the last Conservative Government, events have proven, if anything, that they surpassed what had been expected.
Mr Field
As I recall it, the point was conceded by Opposition Members, not by those on this side.
The relevance of all this to our current economic woes should not be underestimated. With global investors buying into the fiscal assurances made by the erstwhile Government, the rosy forecasts played their part in making it easy for Britain to borrow money during the past decade, and borrow we did, even in the good times. We all now know the disastrous consequences that came to pass.
This salutary experience provided the genesis of the idea for an office for budget responsibility. I must confess that when the Chancellor first mooted the idea in late 2008, when shadow Chancellor, I was sceptical and thought that it sounded like the ideal proposition to be made in opposition and then quietly forgotten. I believe that it is to his great credit that the notion saw the light of day so soon after my party reached government.
My other fear was that it might be an overly inflexible straitjacket to constrain freedom of manoeuvre. Again, the Chancellor has addressed this point up front, as has the Economic Secretary. The Chancellor desires and even relishes such a restriction on himself—and, I suspect, on his successors. Although it might not prove to be quite as revolutionary as the Treasury would have us believe, I accept that it is still an important step towards transparency and accountability in forecasting budgetary numbers.
My only reservations are relatively small and relate to issues of practice, rather than of principle. I fear that the real strains and potential limitations of any office for budget responsibility will unfortunately come at the point in the economic cycle when we most need prescient and instinctive judgment. At such times of crisis or near crisis in any economic phase, we require a robust willingness to stand up against the conventional wisdom of the day.
In the run-up to the 2008 financial crisis, for example, no forecasting organisation saw the crash coming. No one in this House, not even the Secretary of State for Business, Innovation and Skills, despite all that is now said on his behalf, really foresaw precisely what would happen. That includes all the independent bodies, such as the Institute for Fiscal Studies. Let us wonder how the OBR, had it been established, might have acted only three or four years ago. Had it not shared the outlook of other forecasters, would it have had the mettle or the strength in 2007 to tell the previous Government that they were living far beyond their means? How would it have been viewed if it alone had advised the Government at that stage to hold back on their spending plans or, indeed, increase the tax burden? I believe that the true test of its effectiveness will come only when it is required to deliver such unpalatable news in future.
Similarly, what if the OBR had concurred with the forecasts of other organisations at the time but a more responsible Chancellor had been in place who instinctively viewed the economically clement weather as only a mirage? Might the perceived infallibility of an OBR forecast have restricted his or her ability to take measures that went against the common wisdom? To that extent, I have some sympathy with what has been said by those on both Front Benches, because we do not know how forecasts will pan out. Even as recently as the emergency Budget on 20 June 2010, many predictions for growth; and certainly for unemployment were made at the time that even I thought were slightly too optimistic. The OBR’s notion was that unemployment would reach a peak during the current tax year. We hope that that will be the case, but that will not be down just to Government policy, by any stretch of the imagination. I think that the way the economic cycle has worked out globally means that unemployment is likely to be somewhat higher during 2011-12 and perhaps even higher still the following year.
I believe that there are some unavoidable conflicts in the OBR’s operation. Organisational independence is absolutely vital to its working and credibility, as the Economic Secretary noted in her contribution. However, it must necessarily rely on a close relationship with the Treasury in order to understand its methods and have access to its data. Members have already mentioned the blurring of those boundaries between the Treasury and its new independent conscience that led to the first hiccup last summer—the argument that spilled over from the release of the OBR’s unemployment forecast, which happened to bolster the Prime Minister’s argument when he was under fire later that day at Prime Minister’s questions.
One must accept that there will almost inevitably be an ongoing tension and an inherent potential for a conflict of interest, but I hope that that has been eased now that the OBR has been able to move out of its Treasury offices and acquire an important physical independence. Without the trust that stems from such autonomy, the OBR is absolutely nothing. Nevertheless, there is also a danger that it will be seen as perhaps too credible and as a panacea in its own right.
Sajid Javid
My hon. Friend will note that in her closing remarks the hon. Member for Wallasey (Ms Eagle) told the House not to see the OBR as a panacea. Did he notice the irony of that statement, because it was the previous Government who passed the Fiscal Responsibility Act 2010 and presented that as a panacea to the nation, pretending that it is possible to legislate and bring down the deficit without taking any tough decisions?
Mr Field
I do not want to go too far into the past, but my hon. Friend is absolutely right. We now recognise the hubristic foolishness of the notion of ending boom and bust and that the economic cycle had somehow been put to one side. We have all now learned that lesson, and this generation of Members will be much more sceptical about any such panacea that is proposed in future.
As I have said, no organisation, not even those without links to the Government, forecast the scale of the economic crisis. Ultimately, economic forecasts are just that, and if we place blind faith in the independent projections, potential risks might also be ignored. Therefore, part of the OBR’s continuing role must be constantly to remind us all of its own fallibility and advise on a range of possible outcomes, pointing out not only to politicians, but to financial markets, the longer-term threats to our economy in the event that the markets, in particular, prove too forgiving.
Putting aside those concerns, which are relatively minor in comparison with the entirety of what we are trying to achieve, there is a great deal to welcome, particularly with regard to transparency and accountability. Furthermore, if the OBR works as it should, it is likely that any unofficial tinkering by the Treasury will be flagged up early and properly scrutinised by Parliament, returning some long-lost gravitas to the Treasury Committee and to Parliament itself.
As I have said in this House before, the restoration of confidence to our economy was always going to depend largely on rebuilding trust. The establishment of the OBR marks an important milestone in encouraging us to place our faith once again in the financial and political systems of our nation. We must of course be alert to the potential pitfalls in its operation, but it also represents an important check against a hitherto unchecked Treasury, and as such the OBR must now be treated as a credible new fixture in this fresh financial landscape.
Mr William Bain (Glasgow North East) (Lab)
It is a pleasure to speak in this debate. In giving the Bill’s proposals qualified support, Opposition Members view the creation of the OBR as part of the direction of reform started by the previous Government, with the creation of the Monetary Policy Committee of the Bank of England to decide on monetary policy and the establishment of the Office for National Statistics. The International Monetary Fund has said that the OBR’s proposed mandate is
“broadly consistent with established best practice for independent fiscal councils.”
Placing the Office for Budget Responsibility on a statutory basis is an important stage both in its development and in securing its greater independence from the Treasury, but Opposition Members will continue to scrutinise the Bill’s provisions closely to ensure that the OBR is as genuinely independent from the Government as it can be, and sufficiently accountable to the House.
It would be unacceptable if the OBR’s independence were compromised by insufficient access to its own resources, or if it were subject to excessive intervention by the Treasury. The OBR is due to receive £1.75 million per year in funding until the end of the current spending review period, but higher than expected CPI inflation might see that financial support fall in real terms. The Institute for Fiscal Studies recommends, on page 56 of its green budget, that
“the OBR should be as transparent as possible about what meetings have been held, and when and how all key assumptions made in its forecasts were decided upon”.
Internationally, it has been established that fiscal councils can undertake four main roles in connection with economic policy: first, provide objective macro-economic forecasts on which Government budget proposals can be based, as carried out by the Centraal Planbureau—CPB—in the Netherlands and by the Economic Council in Denmark; secondly, cost various Government policy initiatives, as performed by the Congressional Budget Office in the United States, the CPB in the Netherlands and the Parliamentary Budget Office in Canada; thirdly, evaluate whether fiscal policy is likely to meet its medium-term targets, as the Fiscal Council does in Hungary; and fourthly, analyse the long-term sustainability of fiscal policy, with examples being the CPB in the Netherlands, the CBO in the US, the Government Debt Committee in Austria, the Fiscal Council in Hungary and the Fiscal Policy Council in Sweden.
Of those functions, the OBR appears to cover only the first and third. Fiscal councils are less likely to engage in normative analysis of economic policy; only the Austrian Government Debt Committee, the Danish Economic Council and the Swedish Fiscal Policy Council appear to carry out that role.
The OBR’s role includes responsibility for preparing the Government’s economic and fiscal forecasts and issuing them alongside fiscal forecasts with the Budget. That is clearly helpful to the Government, but it means that Ministers are able to prepare in detail for any consequences of a Budget before the OBR makes its assessments public. Without safeguards, that could lead to concerns about the extent of private consultations between Ministers and the OBR prior to publication—the perceived problem during the release of unemployment data last summer.
As Lars Calmfors, chair of the Swedish Fiscal Policy Council, wrote in The Guardian on 28 July last year:
“It might be better if the OBR provided a post-evaluation of the budget as an input into the work of parliament (in addition to a forecast before the budget).”
The IFS also concludes in its green budget that there is a case for the OBR
“to take as much advantage as possible of the required end-of-year fiscal report to conduct and communicate detailed analysis of how and why outcomes deviated from the forecast.”
As my hon. Friend the Member for Wallasey (Ms Eagle) said, there are also questions about the use of different forecasts by the Treasury, the OBR and the Bank of England. The Bank already produces macro-economic forecasts. As the IFS again concludes:
“Those produced by the OBR will be used when deciding fiscal policy, while those produced by the Bank of England will be used by the MPC”—
the Monetary Policy Committee—
“when deciding on monetary policy.”
That might lead to a situation in which fiscal and monetary policy is not sufficiently well co-ordinated.
On fiscal forecasts, progress has been made to underline the OBR’s independence in reaching its conclusions, but it needs to make as much data as possible, as well as the details of its financial models, available to the public. In evidence to the Treasury Committee recently, Professor Tim Besley recommended that the OBR should be able to communicate with key international bodies such as the International Monetary Fund, the EU and the OECD.
The OBR’s mandate will not in itself generate higher growth, and that brings us to the proposed charter of fiscal responsibility to be created through clause 1. The aim of the charter as stated is to create
“objectives in relation to fiscal policy and policy for the management of the National Debt,”
and to establish the Government’s “fiscal mandate”. Opposition Members have no problems with that concept; indeed this House legislated for similar goals in the Fiscal Responsibility Act 2010, but the real difficulty is with the Government’s proposed fiscal mandate of attempting to eliminate the deficit over a four-year period—and the effects that that is already having, as the country can see, on growth.
The OBR has already revised down its growth forecast for 2011, from 2.6% when the Government took office last May to 2.3% after the emergency Budget in June; and it did so once more, to 2.1%, after the comprehensive spending review in November. We will see on 23 March whether those figures have to be downgraded again in the light of growing evidence that the Government’s decisions on the economy have seen it take a turn for the worse this winter.
When Labour left office, the recovery was picking up, with growth of 1.1% in the second quarter of 2010, and, according the OBR’s own analysis, the deficit for 2009-10 came in more than £20 billion lower than forecast. The Office for National Statistics was clear that, even once the effects of December’s inclement weather were taken into account, there would have been no growth at all in the last quarter of 2010.
The Government should adopt a fiscal mandate in the Bill to put jobs and growth first in order to ensure that cutting the deficit does not harm the productive capacity of the economy, and they should end their complacent argument that the economy is “out of the danger zone”. With the country facing 20% youth unemployment, rising prices and stagnant growth, that is not a claim that either the Prime Minister or the Chancellor can credibly make.
Sajid Javid
The hon. Gentleman will know that Government debt stands at £1 trillion. According to a recent ONS report, if we add on the bank debt that the country inherited from the previous Government’s policies, we find that the figure is about £2.3 trillion—equal to 160% of GDP. Does he consider that to be a good legacy with which to engender growth?
Mr Deputy Speaker (Mr Lindsay Hoyle)
Order. I am trying to allow some freedom, but we are in danger of straying off Second Reading and on to a general debate about the economy. Can we please come back to the debate in hand?
Mr Bain
I am very grateful for that guidance, Mr Deputy Speaker.
To conclude my response to the hon. Gentleman, public sector net debt in 2007-08 was 36.5%, so it was lower than that which we inherited when we came to office.
The analysis of the IFS, in chapter 2 of its green budget, produces the conclusion:
“The financial crisis and associated recession have reduced revenues and, to a greater extent, increased public spending as a share of national income. Without action, there would have been an unsustainable increase in borrowing and debt. The government’s spending cuts and tax rises are forecast to be sufficient to return the UK’s public finances to a sustainable position, but the same would have been true under the fiscal consolidation plan set out by Labour in its March 2010 Budget.”
I doubt that even Government Members would label the IFS a deficit denier, so a fiscal mandate that pays insufficient attention to the impact of higher growth and employment in bringing the public finances back to stability will fail the needs of the country.
We look forward to scrutinising the Bill in Committee, to improving the operation of the OBR and perhaps, during the Bill’s proceedings, to securing the change in fiscal mandate that would improve the economic prospects of the British people.
Alec Shelbrooke (Elmet and Rothwell) (Con)
In this debate on the Bill and the Office for Budget Responsibility, I would like to focus on the word “responsibility”. Interestingly, Members in other parts of the House have focused on the downgrading of the growth forecast from 2.6%, to 2.3%, to 2.1% and possibly lower, but at no point has it been said that this allows the Chancellor to ensure that we have a Budget that is based on facts rather than on what he would like the growth figures to be. That is the problem of previous years that led to a bunker scenario.
David Rutley (Macclesfield) (Con)
I wonder whether my hon. Friend has noticed that the Institute for Fiscal Studies has said:
“If an OBR had been in existence over recent years it might have discouraged Gordon Brown from persevering with fiscal forecasts that most independent analysts thought over-optimistic from 2002 onwards”.
Alec Shelbrooke
I am most grateful for my hon. Friend’s intervention, which makes my point. If the OBR had been there in the past, it would not have been possible to proceed with the bunker mentality that I mentioned. Alternatively, the Chancellor could still have moved forward with the same forecast, but everybody would have known exactly where the blame lay and got rid of the arguments that we hear time and again whenever we talk about the horrific financial mess that this country is in—the chorus from Labour Members saying, “It’s the banks, it’s the banks.”
Alec Shelbrooke
My point is proved by that sedentary intervention. Labour Members think that the whole financial crisis is down to the banks.
There is no doubt that the banks contributed to the global recession, but there is equally no doubt that this country was one of the worst placed countries in being able to deal with the downturn. Let us not forget what a structural deficit is. Again, I see Opposition Members shaking their heads, completely in denial of the fact that this country was living way beyond its means. One does not rack up a £1 trillion debt in the good times if one is acting sensibly. While £120 million a day in interest is going to foreign nations, we see councils around the country, especially Labour-run councils, cutting front-line services that impact on the public and trying to blame the Government, yet never mentioning what we could have done with that £120 million a day. We have to get a grip on the economy.
I want to return to the OBR, because I am conscious, Mr Deputy Speaker, that you have been trying to keep the debate on track. Let us consider the name of this body —the Office for Budget Responsibility. “Responsibility” is a word that has been lacking in the governance of this country and its fiscal policy, not only in the Treasury but, as we recently learned from senior civil servants, in other Departments that lost control of spending. We in this House have to be responsible and move things forward.
Alison McGovern
The hon. Gentleman rightly says that we should be cautious. How successful does he feel that previous attempts to add caution to Budgets were? The National Audit Office has previously examined the assumptions made by the Treasury. For example, it was assumed in the March 2010 Budget that GDP growth was 0.25% lower than it really was. Would he like to comment on how those previous attempts at caution might feed into the OBR’s future work?
Alec Shelbrooke
As the hon. Lady suggests, previous forecasts and attempts at caution came from many different angles. The public will recognise that the OBR is giving us a proper set of figures that can be relied on. If the Chancellor of the Exchequer then ignores those figures and ploughs ahead, not only would the calls from the Opposition be deafening but the public would know that the Chancellor was acting against their interests.
Matthew Hancock
Does my hon. Friend know that in 1995 the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) called for a panel of independent forecasters to express their views on public finances? Does he agree that it is a great shame for the nation that the right hon. Gentleman did not act on that when in government, because it might have meant that there was restraint and, in turn, that he would not have left this country in such a terrible mess?
Alec Shelbrooke
I am grateful for that intervention. Needless to say, one of the very first things that our Chancellor of the Exchequer did was to give away the forecasting power to an independent body so that our statistics be relied on. This is about not just public faith in the statistics but the faith of the money markets internationally. That is why the forecasts and credit ratings of this country have been upgraded since the emergency Budget, and secured since the Government laid down a clear, responsible fiscal policy on how they were moving forward. These are highly important matters.
Like many people, I am sure, I am sick to death of the cherry-picking by Labour Members. Stopping that taking place strengthens the case for the Office for Budget Responsibility. The hon. Member for Glasgow North East (Mr Bain) told the House about GDP figures between 1997 and 2010, when Labour left office, but he never mentioned that the private finance initiative was taken off the books. That meant that huge amounts of public debt and public spending were not linked in to those GDP figures because of a fiddle done with the statistics. That cherry-picking must, and will, stop under the Office for Budget Responsibility.
We are told that forecasts can change and that it is therefore not the fault of the previous Chancellor that we are in such a mess. I would like to have seen the forecasts that were made for the price of gold in 2000, when it was at its lowest level ever. Was everybody saying, “It will just drop further and further, so sell the lot now”? I very much doubt it. When things go wrong, it is too easy for the Opposition to say, “It wasn’t our fault—forecasts change.” We now have a Chancellor of the Exchequer who has taken the bold step of passing responsibility to the Office of Budget Responsibility and has put together a Budget that is based on realistic figures rather than what he would like them to be, buried in his bunker at No. 11.
Alison McGovern (Wirral South) (Lab)
It is a pleasure to follow the hon. Member for Elmet and Rothwell (Alec Shelbrooke), whose robust arguments I always enjoy, if not agree with.
The purpose of this Bill is to separate politics and economics, which is not always an easy job but is one that it is important to do. There is a body of academic understanding about the importance of the independence of judgments, forecasting and transparency, and that importance is recognised and understood on both sides of the House. In many ways, the Bill makes clear Labour’s economic legacy of the past decade—rules-based economic policy. The reasons for the sustainable investment rule and the golden rule were clear: after decades of boom and bust, it was felt that the way forward was to establish clear lines of accountability and rules by which economic policy might be set.
Alec Shelbrooke
I agree that the golden rule was important, but how does the hon. Lady respond to the fact that the dates of the cycles were moved to fit in with what the then Chancellor was claiming instead of sticking to the timeline that he originally outlined for the fiscal cycle?
Alison McGovern
Understanding the business cycle has been the job of economists since the dismal science began. The fact that it is difficult does not make it the wrong thing to try to do. I applaud some of the work that has been done by the Treasury and others in trying to find a better way forward. The hon. Gentleman asks an important question that cannot be dismissed by saying, “Oh, this is just people politicking.” Understanding the business cycle is extremely difficult.
When we consider the importance of rules-based economic policy, it is important to reflect on the fact that the Office for Budget Responsibility is to fiscal policy what the independence of the Bank of England was, and remains, to monetary policy: that is, it is an external-to-the-Treasury body that is charged with an important economic function that will drive the policy prescriptions that the Government make, in liaison and discussion with, and working alongside, independent chairs and officials from the organisations concerned. I have no doubt that that is an extremely difficult job. I wonder how real that independence can be. That is an important question for us to consider as the Bill moves through the House. The OBR’s work will be inextricably linked with Departments.
That point was brought home to me by the answer to a parliamentary question in which I asked the Department for Work and Pensions for forecasts of the number of young people who would be unemployed through the life of this Parliament. The Minister of State, Department for Work and Pensions, the right hon. Member for Epsom and Ewell (Chris Grayling) wrote:
“The Department produces projections for business planning purposes which are aligned to the overall independent claimant count forecasts published by the Office for Budget Responsibility”.—[Official Report, 31 January 2011; Vol. 522, c. 587W.]
I wondered what the nature of that alignment would be. I understand that it will be an iterative process as business planning projections are made and discussed in challenged conversations with the OBR. It will not be easy to maintain the independence of this body, but we must all strive to do so.
If you will allow me, Mr Deputy Speaker, I will take this opportunity to say that I mentioned that parliamentary question in Treasury questions last Tuesday, and said that
“the Government’s own business planning projections show that the proportion of young people on the dole by the end of this Parliament will be reduced by less than 1%.”—[Official Report, 8 February 2011; Vol. 523, c. 153.]
I misspoke, and should have said less than one percentage point.
It will be a difficult job behind the scenes to maintain the independence of the OBR. Lars Calmfors, who has been mentioned, has argued that it will be difficult to stop or prevent behind-the-scenes negotiations with the Treasury. However, I believe that the Government have set such store by the independence of the OBR that they want it to succeed and its independence to be maintained. As hon. Members have suggested, it could have increased accountability to Parliament via the Treasury Committee. I am sure that the members of that Committee will be perspicuous in demanding that accountability and independence.
To conclude, I will make a few remarks about rules-based economic policy. I take it from this debate that it is agreed across the House that the right way to make economic policy is to set out ahead of events the rules and principles that the Government wish to stick to, and that the Government should allow themselves to be held up and judged on the basis of those rules. What could possibly be the problem with that approach to making economic policy? In some ways, we are already seeing the problem. Young people in this country who are unemployed because of the global shock face significant difficulties. We have to ask ourselves how the rules that we have set as the basis of our economic policy allow us to act to ensure that our economy runs well. Surely, economic measures are the tools to aid a well-functioning society, not the other way round. If so, our economic policy must be able to respond to shocks.
Not only must the Government say what the rules for their economic policy are and allow themselves to be judged by independent bodies on those rules, as they are doing; they must also say how they will respond to crises. Should this country find itself in a further economic downturn, facing an even worse situation for residents of this country, especially those on the lowest incomes and at the start of their careers, who face severe unemployment, how will the Government use the flexibility in their economic policy to return the country to growth, and how will their economic rules take account of the possibility of shocks? This is a significant challenge for the Government and I hope that all hon. Members will add to the scrutiny of the Bill as it progresses.
David Rutley (Macclesfield) (Con)
Like other hon. Members, I will focus my remarks on the measures that will put the Office for Budget Responsibility on a statutory footing, where it needs to be. I will talk about how important it is to take forecasting out of the Treasury and to give Parliament a greater role in maintaining the independence of the OBR, which will be vital, as everybody has said.
Above Bollington stands one of the most loved landmarks in the Macclesfield constituency: White Nancy. This unique, brilliant white summerhouse was built by the Gaskell family in 1815 and it stands proudly on top of Kerridge hill. Some think that it was built to commemorate the battle of Waterloo. Whatever the reason, White Nancy is today a well known and trusted reference point. When someone sees it, they know exactly where they are. That is what I hope the OBR will become in the landscape of the UK economy.
The Economic Secretary mentioned several reasons for the creation of the OBR, and spoke of the importance of creating it at this moment in time. I think that it will provide better forecasts, address the “judge and jury” issue that we have heard about and effectively hold Governments of all persuasions to account. That is exactly what is required.
To begin, I will give a few thoughts on better forecasts. I was reminded recently of an observation made by the American economist John Kenneth Galbraith:
“The only function of economic forecasting is to make astrology look respectable.”
I am not a great fan of his economics, but his one-liners were pretty good. Like many Members, I accept that economic forecasting is not a precise science. However, it is vital that our expert forecasters are allowed the objectivity and independence that are needed to do the best possible job. They must be able to look into their crystal balls outside the Treasury building and free from Treasury influence. The ability to recruit economic talent from outside the Treasury will be a great help. I believe that the OBR is well placed to provide better forecasts.
The creation of the OBR can address the fundamental conflict that we have seen in successive Governments of the Chancellor and the Treasury being both judge and jury, through setting fiscal policy and making the forecasts for the economy and public spending. By their nature, economic forecasts are based on assumptions, opinions and judgments. The temptation for Treasury Ministers to make a judgment or prepare a forecast that helps the Government of the day presents a clear challenge to the credibility of the forecasting process. The OBR is an important and positive step in removing that temptation.
I was struck by Lord Turnbull’s response to me on this subject when I served on the Treasury Committee some months ago:
“What happens is that there’s a sense of giving yourself the benefit of the doubt, of wishful thinking. That is what the OBR is there to correct.”
He went on:
“The OBR is important because it is an antidote to and a constraint on wishful thinking. It will bring more rigour, and it has already begun to do so”.
When I asked him more about the wishful thinking during his time at the Treasury, he said:
“I think that there was wishful thinking all the way through. If you had experienced 60 quarters of uninterrupted growth, it wasn’t surprising that you tended to think that somehow something fundamental had changed.”
That is exactly the type of thinking that the OBR has been designed to review, scrutinise and challenge, which is an urgent priority.
The OBR can provide better forecasts, it will tackle the judge and jury dilemma, and it is empowered to hold this Government and future Governments to account. That will be a vital task at this challenging time and for future generations. So what of the OBR’s priorities? In its short life, it has demonstrated its independence, the professionalism of its personnel and the high quality of its output. In its first forecast on the economy back in June, it brought some realism back to the growth forecasts. It was pretty clear that those published by the previous Government in the run-up to the election contained too much wishful thinking. The markets were openly sceptical, which in itself was an unsustainable position. In that sense, the OBR has scored a notable success already by helping to restore confidence in the forecasts for public spending and the performance of the UK economy.
It is vital that we build on that promising start and put the OBR in an unrivalled position. I was pleased to see the recent publication of a report by the OBR that detailed how it sets out to co-ordinate its activities with other Government Departments to produce fiscal forecasts, and the processes that it will follow. That transparency will help further strengthen the organisation and its standing. Its chair, Robert Chote, said recently that he wanted the process of fiscal forecasting to be as accessible as possible. In his words, he wants to
“let people see inside the forecasting sausage machine”.
That is not quite how I would have put it, but I agree with the sentiment.
Beyond the transparency and accessibility of the OBR, which is pivotal, it is essential for it to become a respected and trusted reference point. That is a big ambition that will require the highest standards to be maintained, and constant vigilance will be needed to ensure that we get the OBR where it needs to be.
Having served on the Treasury Committee, with hon. Members who were present earlier in the debate, when the creation of the OBR was debated and key officers were appointed, I commend the work that the Committee undertook at that time and the role that it continues to perform today. I also wish to take the opportunity to commend the Chancellor for his decision and for the inclusive approach that he adopted during the creation of the OBR. By giving the Treasury Committee a meaningful role, he has gone a long way towards empowering Parliament and demonstrating the need for the OBR’s independence. That established from the very start its credibility as an independent body and will help build that credibility in Parliament. By giving the Committee the power of consent over appointments and dismissals, the Chancellor is giving Parliament greater power. The Committee also has the important power to carry on vetting those who are appointed, as it did last year and will continue to do. It is important that the OBR has the ability to prevent Ministers from removing people who might be perceived as being a bit too objective for their liking.
The Government have gone further and even given the OBR the power to submit to the Treasury Committee its own additional estimates memorandum, which will enable it to undertake scrutiny of funding for the OBR. As the Committee’s report set out clearly, it will take a much stronger role in observing the OBR’s work. It states that
“it is vital that it commands confidence across party boundaries. We will take evidence from the organisation regularly as part of the budget process. We will intervene if we believe the OBR’s independence is threatened. We expect the members of the Budget Responsibility Committee or the nonexecutive directors to report any concerns they have to us. Only if it is independent will the OBR be successful.”
There is a clear role for the Committee. It has the OBR in its sight and will continue to involve the OBR in its important work.
Some Members, such as the hon. Member for Glasgow North East (Mr Bain), mentioned international comparisons, and other countries have indeed had bodies similar to the OBR established for decades. One of them is the Central Planning Bureau in the Netherlands, which he mentioned. That body has responsibility for scrutinising not only Government but opposition spending plans. I am sure that Labour Members’ heartbeat fluttered briefly as they thought about the implications of that, but perhaps if the CPB operated in the UK it would not have too much work on its hands right now. We will see what develops on the Opposition Front Bench over the decades ahead. The serious point is that the OBR could learn from such international comparisons. A huge amount of learning can be done from other countries, and I hope that the OBR will examine them in developing its functions and work in the years ahead.
The permanent creation of the OBR is an overdue step. It will bring more transparency and greater confidence to economic forecasts, and it has already begun to build a solid reputation as an objective and authoritative voice as well as gaining respect in all parts of the House. The Bill represents an important structural change in how the Treasury works. It will take the politics out of economic forecasting and give Parliament greater powers of scrutiny. Personally, I want to ensure that the OBR becomes the trusted, respected reference point that I talked about earlier, and I will do all in my power to support it in that work. This country needs it. We must put such institutions in place to ensure that our public finances are never allowed to get into this mess again.
Kate Green (Stretford and Urmston) (Lab)
Like colleagues throughout the House, I welcome putting the Office for Budget Responsibility on a statutory footing and the opportunity that it offers for independent forward financial forecasting. That will enable us to see clearly the impact of policy decisions on the public finances, and it will set the context for, and inform, future policy choice. However, as has been pointed out, the OBR and its forecasting mechanism do not of themselves correct or reshape policy mistakes. It is the Government who set the fiscal mandate, and the OBR is there to say whether that mandate has been met. There is no requirement on the OBR to offer any critique of that mandate, or to judge whether it is fair.
We cannot examine only whether the Government have achieved their forecasts. I support the remarks of my hon. Friend the Member for Wirral South (Alison McGovern), who suggested that there was a larger context to address—whether the Government’s policies reflect the right policy ambitions and produce the right social outcomes, and whether the spending on them is effective. To that extent, I am particularly interested in Ministers’ comments on the relationship between the OBR and the other organisation highlighted in the Bill, the National Audit Office.
Like my hon. Friends, I am concerned about the Government’s current mandate to eliminate the deficit within four years. We are concerned to critique not just the mandate but the policies that will bring about the achievement of it. We are extremely concerned that those policies will have a harsh impact on the lives of the people across the country whom we represent, and we are concerned about their impact on growth, employment and intergenerational fairness. That last point is specifically highlighted in the draft charter, and I would be interested to hear the Exchequer Secretary explain how the OBR will judge and assess long-term intergenerational fairness. It is not sufficient simply to say that we cannot pass on to tomorrow’s children the deficit of today, because today’s children are bearing the burden of the policies that the Government are adopting to address that deficit. I would welcome an explanation of exactly what Ministers mean by intergenerational fairness and how the OBR will assess it.
Alison McGovern
Does my hon. Friend think that in addition to that, the Government ought to consider the effect of unemployment on a person’s long-term career, and therefore on their family, as part of intergenerational fairness?
Kate Green
My hon. Friend makes an excellent point. Some superficially appealing terminology has been bandied about in relation to the Bill, but we need to know the substance of what Ministers understand to be fair.
Members in all parts of the House welcome the opportunity for transparency that lies within the Bill, but as others have pointed out, that transparency is potentially undermined if the OBR does not secure the resources necessary to ensure that its independence is not compromised. The OBR needs to be adequately resourced to carry out a full and proper analysis. In that context, looking at the full impact of policy includes modelling imputed behavioural change, about which the Government have so far shown themselves to be casual, including in their analysis on the introduction of the universal credit, which is one of their major policy proposals. Great claims have been made for the universal credit’s impact on increased benefits take-up and labour market participation, but the Department for Work and Pensions’ analysis of such behavioural changes to drive such outcomes is remarkably thin. How deep can the OBR dig when departmental analysis apparently does not do so?
There is two-way traffic in policy making and in analysing the impact of policy initiatives. The OBR has been set up specifically to reflect in its forecasts what we might call policy “knowns”, but as was pointed out, there are opportunities to allow for dynamic forecasting so that we can judge the impact of new policies on the public finances in future. I believe strongly that the creation of the OBR offers an opportunity to tie those two aspects of policy forecasting together, so that it is possible to verify departmental impact assessments at the time when policy is being considered—prior to its implementation—and as part of the process of legislative scrutiny and approval by the House.
As my hon. Friend the Member for Wirral South pointed out, there are tensions involved in ensuring that the OBR has a role in scrutinising policy making as it develops and emerges, but there is an important opportunity to enable Parliament effectively to critique, to challenge and to improve. How do Ministers see the OBR’s role in the context of iterative policy making, and how do they think that tension will be resolved?
I look forward to the ongoing process of the passage of the Bill to implement the OBR, and to its independent reports and analysis. However, it is important to understand that the Bill is a step on the way to better policy making and scrutiny rather than a job fully done. Of course, the OBR offers great potential to aid our understanding, but I am clear that it is just one element of how we judge policy cost and impact, and most importantly, policy success.
Stephen Williams (Bristol West) (LD)
I guess that you, Mr Deputy Speaker, and many hon. Members have a collection of fridge magnets. I have one back home in Bristol that I acquired on a visit last summer to Hughenden manor. Of course, Disraeli, who lived there, is a rich vein of quotes, and perhaps one of his most famous is that there are “lies, damned lies and statistics”, which is what this debate is all about. Statistics are never more controversial than in economics. There was quite a controversy surrounding the last quarterly growth figures—I will make no jokes about snow—but in forecasts and retrospective reporting, there are random factors, and such reports are often revised.
Forecasting, of course, is even more contentious than retrospective reporting on economic events. I am sure that all Chancellors have at least been tempted to inject political factors into what the hon. Member for Wirral South (Alison McGovern) called the “dismal science” of economics. Whether economics is a science at all is debatable, but it is certainly inexact as a social science, and very heavily influenced by politics. In fact, it was traditionally known as “political economy”.
In all Budgets and autumn statements, Chancellors forecast tax yields and outlined the effect of their policies on employment and unemployment. They said who would benefit and described the impact of their policies on the fiscal balance and debt. As a chartered tax consultant and in the last six years as an MP, I watched a decade of Budgets by the former Prime Minister and Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), whose first act as Chancellor was to set up the independence of the Bank of England, to which many hon. Members have referred. The implementation of a Liberal Democrat manifesto commitment 13 years before we got around to joining the Government was welcome, but after 1997, the former Chancellor made up his own rules as he went along on everything other than monetary policy. The golden rule has been mentioned several times, but his best friend, Prudence, has understandably not been mentioned by Opposition Members, because as we all remember, in all his Budgets and forecasts, everything was rosy. The Chancellor always confounded his critics and said, “Everyone else is wrong. Lo and behold—what a surprise! —I have a marvellous thing to announce.” What happened? The 2008 crash happened.
Alison McGovern
On that very note, which was the more prudent: putting the country into a situation in which people could not withdraw cash from the banks or recapitalising the banks, as happened?
Stephen Williams
I was talking about events prior to the crash, rather than the policy response to the crash itself, which was in any case initially rather timid and slow. My right hon. Friend the Member for Twickenham (Vince Cable) repeatedly urged the Chancellor to nationalise Northern Rock, which was the first symptom of the crisis, but those urges were resisted for quite some time.
Mr Deputy Speaker (Mr Lindsay Hoyle)
Order. We are getting tempted into an area where we should not be. We are dealing with Second Reading. I am sure the hon. Member for Bristol West (Stephen Williams) will stick to that, and that Mr Shelbrooke’s intervention will be relevant to it, and not a history lesson for those in the Chamber.
Alec Shelbrooke
Thank you, Mr Deputy Speaker. My hon. Friend was trying to make the point that the key word in the name of the Office for Budget Responsibility is “responsibility”.
Stephen Williams
I thank my hon. Friend for that intervention.
Predictions and forecasting are at the heart of the Bill. I slightly disagree with my hon. Friend the Member for Cities of London and Westminster (Mr Field), my coalition colleague, who has now gone off to his black-tie dinner, because the crash—if not its scale—was forecast by my right hon. Friend the Member for Twickenham. I remember him being derided and sneered at in the House at the time, including by the hon. Member for Wallasey (Ms Eagle), who today led for the Labour party.
I welcome the setting up of the OBR, and particularly the appointment of Robert Chote from the Institute for Fiscal Studies as its first permanent chair. I am sure that all hon. Members have cited IFS reports in support of our policies at various times, and that we have all been on the receiving end of its critiques, which are not always welcome. Nevertheless, everyone recognises that those reports were arrived at independently, and therefore that they had authenticity and credibility about them. I also welcome the appointment for five-year terms of Mr Chote’s fellow board members and the ongoing Treasury Committee scrutiny, of which my hon. Friend the Member for Macclesfield (David Rutley) spoke. As we heard, the Bill is not a panacea for dealing with economic ills, but I am sure that the OBR will none the less restore credibility to our statistics and give a sound basis for decisions.
The second part of the Bill, which has not been mentioned much, deals with the National Audit Office. As I have mentioned Disraeli, I will mention in balance Gladstone, who set up the NAO. All Members of Parliament will recognise that the reports produced by the NAO are excellent and well informed across the range of policy issues. As the hon. Member for Stretford and Urmston (Kate Green) said, it is the role of the NAO to review the impact of Government policy especially in financial areas, and to examine whether money has been spent efficiently according to the original remit of the policies. Although the NAO formally reports to the Public Accounts Committee, of which I was briefly a member in the last Parliament, its reports and its work are fundamental to the operation of the House of Commons itself.
I welcome the statement made by the board of the NAO and the professional qualifications now held by some of its board members. I remember going to a briefing by the NAO not long after I became a Member of Parliament and being astonished by the lack of financial qualifications of many people in the civil service—I shall avoid looking in their direction—who none the less managed the purse strings of billions of pounds of public money. Professional qualifications should also be rolled out around Departments.
David Rutley
As hon. Members have said, one of the opportunities provided by the OBR will be more expertise from people outside the Treasury, who will put their views, thoughts and experience to work on forecasting. Does my hon. Friend agree?
Stephen Williams
Indeed, I do agree and the OBR as it develops will be able to draw on the expertise in the Treasury, although its forecasts must be its own, not the Treasury’s. Over time, the OBR will develop its own in-house expertise, although it will hopefully not grow into too large a quango—if we are still allowed to use that word.
The Bill is an important hallmark of coalition Government. It shows that the Government are interested in transparency and evidence-based policy making, as well as in listening, especially to advice. It will certainly provide confidence in our national statistics and economic forecasts, underpinning the Government’s overriding aim of restoring confidence and stability to our national economy and public finances.
Sheila Gilmore (Edinburgh East) (Lab)
I seem to be fated—this is the second time in two weeks—to be the last Back Bencher to contribute to a debate. Tempted though I am to continue to speak until as close to 10 pm as allowed by the need for wind-up speeches, I shall resist temptation—I can see my colleagues’ looks of horror. For those of us who are far from home and whose potential valentine is 400 miles away, we have nothing better to do than speak in this debate.
More seriously, it will be useful to have independent forecasts; indeed, it already has proved useful. In the short life of the Office for Budget Responsibility we have seen some figures that even this Government, who have professed a desire to be transparent, might not have been too happy about. Several of my hon. Friends have referred to figures such as the forecasts for unemployment and for economic growth. Had it not been for those reports, the Chancellor and other members of the Government might have been tempted to be a little more optimistic and gung-ho. We saw a little of that even last year when some Ministers talked about economic growth in the second and third quarters. We might have thought that everything was now motoring forward, but the OBR was able to tell us that that was not quite the case. The OBR’s forecasts may not always be palatable, even to the Government who have set it up.
I appreciate, Mr Deputy Speaker, that you have not wanted people to discuss the economy generally, but it was clear from the context in which this debate was put by the Economic Secretary that we cannot entirely avoid doing so. She made it clear that the OBR’s remit is determined by the Government’s view of the economy and what needs to be done to deal with it. She said that deficit reduction was the priority and the context for the OBR, but the question of how to do that remains. How do we reduce the deficit, how fast, and what are the implications of reducing it too fast? The Opposition believe that the actions that have been taken in order to fit the framework set for the reduction of the deficit in this Parliament may be counter-productive. The deficit may in fact rise, because if unemployment rises, demand falls and the economy does not grow, tax revenues will fall even further—and that was part of the reason for our current position. If that happens, we will see the deficit grow.
Alec Shelbrooke
As the hon. Lady has said, the OBR will indeed stop a Chancellor saying, “Growth is going to be this amount, and therefore I will borrow this amount,” while knowing full well that growth might not be so high and he might not be able to repay it. Surely that was the problem in recent years, and it is hoped that the OBR will stop such mistakes from being made again.
Sheila Gilmore
Our views of when it is appropriate to borrow and what the Government should do about the economy are clearly different. Emotive words have been used in this debate, including the term “mountain of debt”. Coalition Members are fond of saying that interest payments on borrowing are wasted. They are also fond of domestic analogies, and we hear a lot about the national credit card being maxed out, but there is another domestic analogy that we might use. When we pay our mortgage payments, we do not say that that is money wasted—it is money being invested for the purpose of acquiring a home.
When I was the convenor of housing for Edinburgh city council, 40p in the pound of tenants’ rents went on debt repayment. Sometimes the local newspaper and council opposition members would say, “This is terrible mismanagement”, but it was not mismanagement—it was an investment in building homes over many years and improving homes with such luxuries as central heating and double glazing.
Stephen Williams
The hon. Lady is talking about debt being run up for investment. Of course the previous Government put most of that debt off the balance sheet of the Treasury completely and into private finance initiative schemes. They ran up debts to fund current expenditure on public services, and that is why we ended up in a crisis.
Sheila Gilmore
The hon. Gentleman is wrong about that. Up to the point of the recession, most of the borrowing was for investment in schools, homes, roads and transport projects. Yes, there were some PFI schemes, and I was interested to hear the hon. Member for Elmet and Rothwell (Alec Shelbrooke) castigate such schemes, because it is my recollection that PFI was a favourite mechanism of the previous Conservative Government, who introduced it. Many of my colleagues in the Labour party were less than enthusiastic about it even during the years of the Labour Government.
I am trying to make the point that there are different ways of looking at the economy and at what the appropriate policies are. I was interested in a brief debate in the Treasury Committee about whether the OBR should look at other policies: should it look at the policies of an Opposition what might be? Outwith that, why should it just look at the particular ground rules that the Government have set out? Those rules will represent one view, but there might well be other views and policies that could lead to different results. The Government appear to have rejected the view that the OBR should look at anything other than Government policy, on the grounds that that would not make it politically neutral, but we need real transparency and a proper debate in the country about the best way forward.
Andrew Griffiths (Burton) (Con)
I have been listening to the hon. Lady’s analogy. She does not like talk of the credit card being maxed out, and thinks it more akin to taking on a mortgage to purchase a home. Does she not agree, however, that having to pay £120 million a day in interest alone is actually more akin to using a credit card to pay the mortgage every month?
Sheila Gilmore
Clearly, I do not agree with that. These two analogies are interesting ones, in that they show the different viewpoints of the different sides of the House. They are both legitimate viewpoints, and it is right that we pull them out and have this debate, because there is not just one way of coming to a conclusion on what we should do.
If the OBR is to develop in the future, one option is to look at different ways of arriving at the ends we all want. There is no suggestion, despite what Government Members say, that Labour Members think it right to run a very big deficit on an annual basis. We have never said that; we have said that we want to reduce the deficit. However, we differ with the Government over the speed at which that is done. That will determine all of these forecasts and where we go from there. If we have those different viewpoints, would it be helpful—other people might think it is not—for a truly independent OBR to be able to look slightly wider than the tramlines that the Government are setting down and about which we have heard so much? Should we be able to forecast only on that basis? It would be interesting to consider whether alternative policies could lead to a different and—I would hope—better outcome.
I do not want to add anything else because I can see that some people here have somewhere far more interesting to go. I hope that some people receive red roses and chocolates tonight in celebration of the day.
Kerry McCarthy (Bristol East) (Lab)
This has been an interesting, if somewhat truncated debate. My hon. Friend the Member for Edinburgh East (Sheila Gilmore) is probably right that the relatively few number of people in the Chamber and the fact that the debate will finish a couple of hours early is not evidence of a lack of interest in the subject under discussion, but proof that romantic hearts beat beneath our tough and cynical exteriors. [Interruption.] I mean some of our tough and cynical exteriors.
We support much that is in the Bill, but I will turn first to the contributions of hon. Members. My hon. Friend the Member for Wirral South (Alison McGovern) said that the establishment of the Office for Budget Responsibility was an attempt to separate politics from economics. I suspect that that will be difficult to achieve, but as she said, it is important that we at least try. She also talked about rules-based economic policies, how they were introduced under the previous Government, and how the establishment of the OBR entrenches that approach. She also spoke at the end of her speech about something that I know is a great passion of hers: the problem of youth unemployment and what we can do to tackle it. I am sure that she will return to it on many other occasions in the Chamber.
As ever, my hon. Friend the Member for Stretford and Urmston (Kate Green) made an excellent speech and talked about how it is important that, when discussing such issues that are technical and very much about structures, we focus not just on the numbers, but on the outcomes that we want to achieve. This is not just a dry discussion about the fiscal mandate and the mechanisms that we put in place to monitor it or to forecast the future trajectory of Government economic policy; it is about the underlying policies brought in to achieve that mandate. She spoke passionately about intergenerational fairness and the importance of considering how we can better model imputed behaviour, and she suggested that departmental evidence was very thin on behavioural change and that the OBR might have a role in fleshing that out. That was a valid point.
My hon. Friend the Member for Edinburgh East talked about how the OBR, if it does not totally instil caution in the actions of Ministers, will at least act as a brake on Governments’ over-optimism and the wishful thinking that leads them to think that things are rosy, or will be rosier than the evidence suggests. She made the point that we cannot divorce the question of reducing the deficit from the question of how we go about doing it and the policies we implement to achieve that end. My hon. Friend the Member for Glasgow North East (Mr Bain) warned of the dangers of complacency, and of thinking that the recovery is secure, that we are out of recession and that the country is out of the danger zone. He also talked about the fiscal mandate for eliminating the deficit and warned of the dangers of pursuing that in too rapid a fashion.
The hon. Member for Cities of London and Westminster (Mr Field) has had to leave to go to a black-tie event. I suspect that he has rather more black-tie events than most of us in the House. The sorts of events I attend usually involve the St George Labour club and beer at 99p a pint. However, he obviously leads a more exalted existence than many of us. Both he and the hon. Member for Elmet and Rothwell (Alec Shelbrooke) were fairly political—dare I say it—in their comments. They made references to the previous Government living beyond their means. The hon. Member for Elmet and Rothwell denied that the banks were responsible for the recession and again mentioned the country living beyond its means. At this time of night, and perhaps with better things to do, we do not want to rehearse those arguments. However, it is important that rather than trying to score political points, we look at the details of the Bill and the seriousness of what it is trying to achieve in introducing a more evidence-based approach to economic forecasting.
The hon. Member for Macclesfield (David Rutley) made a very good and thoughtful speech. He quoted J. K. Galbraith, which I suspect my hon. Friend the Member for—
Kerry McCarthy
I knew it began with a W. Anyway, she is probably very familiar with this quote:
“The only function of economic forecasting is to make astrology look respectable.”
The hon. Member for Macclesfield said that he was not a great fan of J. K. Galbraith. I happen to be a great fan, although I had not heard that quote before. His “A Short History of Financial Euphoria” ought to be required reading for anyone who takes up a job in the City these days. The hon. Gentleman resisted the temptation to resort to political point scoring. His point that the OBR can in time become a respected and trusted reference point is valid—I certainly hope it will be achieved.
What the hon. Member for Macclesfield said about greater powers being given to the Treasury Committee was interesting. I was a member of the Committee for a couple of years when first elected to Parliament in 2005, and I remember spending many sittings seeking assurances from the Financial Services Authority and the Bank of England about regulation, the risks that derivatives trading imposed, and so on. I remember receiving blithe assurances that it was difficult for Committee members— with their limited resources—to challenge on an ongoing basis. If increased powers are given to the Treasury Committee to vet appointments, to scrutinise the work of the OBR, particularly its funding, and to ensure that it has the necessary resources to do its job, thought needs to be given to whether the Committee has the resources necessary to do that job.
The hon. Member for Bristol West (Stephen Williams) slightly lost me at the beginning with his talk about Disraeli and fridge magnets, but then moved on to talk about Bank of England independence, which he claimed was a Liberal Democrat manifesto—
Kerry McCarthy
I am not denying it. The hon. Member for Bristol West said that it was an example of Liberal Democrat manifesto policy being implemented 13 years before they got into government. I would suggest that the reason he is claiming credit for that is that there are very few examples of that now that they are in government.
Let me move on to the Bill. The plans for the National Audit Office have received very little attention in this debate, because there is a general consensus that they are the right thing to do. They are almost exactly in line with our plans for the National Audit Office that we set out in our Constitutional Reform and Governance Bill, which we did not get through the parliamentary process before the May 2010 election was called.
We support the creation of the Office for Budget Responsibility, which we see as continuing the direction of travel that we set in government by giving independence to the Bank of England and the Office for National Statistics. However, we have a number of concerns about the details of the proposals. We welcome the amendments that were introduced in the other place—with some, limited success—to try to make the OBR more independent from the Government, for example by giving it budgetary independence, so that we can be sure that it has the resources that it needs to do its job and produce genuinely independent forecasts without being compromised by Treasury control. We intend to explore that further in Committee, to see whether we can give the OBR greater independence. It is also important to explore in Committee how we make the OBR more accountable to Parliament, rather than to the Treasury.
However, we will not let this Government hide behind the OBR or use its independence as a shield to protect them from valid criticism of the impact of their economic policies. The Government are wrong if they believe that the OBR will protect us from the consequences of the Chancellor’s misjudgments. Indeed, the OBR will help to hold the light up to the Government’s record. It is notable that the OBR has already predicted that unemployment will be higher under this Government than under Labour plans, that growth will be lower under this Government, and that consumer prices index inflation will be higher. In fact, as has been mentioned—I think by my hon. Friend the Member for Glasgow North East, or perhaps by my hon. Friend the Member for Wirral South—the OBR has already had to revise its growth forecast downwards twice, down from 2.6% to 2.3% after the emergency Budget, and down again, to 2.1%, after the spending review. That is a telling verdict on this Government’s policies for growth—or lack of them—and the Chancellor’s failure to produce a growth plan. We wait to see whether the March Budget will force the OBR to downgrade its growth forecast yet again.
The OBR has also confirmed—although the Government seem to have ignored this because it is politically inconvenient for them to acknowledge it—that the deficit was more than £20 billion lower in 2009-10 than expected, owing to firm and decisive action taken by the Labour Government. What is clear—we do not need the OBR to tell us this—is that under this Government unemployment and inflation are rising, living standards are falling and the recovery has stalled. Although we support the substance of this Bill to a large extent and we shall not seek to push its Second Reading to a vote this evening, we remain deeply sceptical about whether the Government have learnt any lessons from the past eight months during which the shadow OBR has been in place. We hope that lessons will be learnt going forward.
The Exchequer Secretary to the Treasury (Mr David Gauke)
We have had an interesting debate and it would be fair to say that there has been some consensus from both sides of the House that it is right and proper for us to establish the Office for Budget Responsibility. I am grateful to my hon. Friends the Members for Cities of London and Westminster (Mr Field), for Elmet and Rothwell (Alec Shelbrooke), for Macclesfield (David Rutley) and for Bristol West (Stephen Williams) for expressing their concerns about the state of the public finances and the record of the previous Government. However, I am also grateful for the comments of Opposition Members, such as the hon. Members for Glasgow North East (Mr Bain), for Wirral South (Alison McGovern), for Stretford and Urmston (Kate Green) and for Edinburgh East (Sheila Gilmore), who supported the concept of the Office for Budget Responsibility.
As my hon. Friend the Economic Secretary to the Treasury said at the start of this afternoon’s proceedings, fiscal responsibility is the overriding priority of this Government. The deficit that we inherited, the debts that the previous Government amassed and the fiscal forecasts that accompanied both have clearly shown the inherent weaknesses that plagued the old way of doing things. The reputation of the Government’s forecasts in recent years was that they had a bias towards optimism. After all, a balanced budget was always just around the corner. In 2003, the budget would be back in balance by 2005. In 2004, it would be back in balance by 2007, and in 2006, by 2008. In 2007 we would have a balanced budget by 2009, and in 2008, we would reach the balanced budget in 2011. It is perhaps apposite to quote Robert Chote in his previous capacity as the man in charge of the Institute for Fiscal Studies, who said that this was a
“sustained display of conviction forecasting”.
Indeed, the over-optimistic approach to the public finances of that era is not purely a thing of the past. We recently learned, for example, that the shadow Chancellor continues to believe that there was no structural deficit in the UK economy in advance of the credit crunch. How wrong can one be? The fact is that there was a perception that, all too often, the temptation to nudge up a growth forecast here or reduce a borrowing number there proved all too great. Governments would preach the principle of prudence while in reality the onus was always on optimism. That serves no one’s interests. Economic policy needs to be based upon the reality—grounded in fact and not fallacy—and to be able to stand up to external scrutiny when put under the spotlight. Credibility must be restored.
It is worth pointing out that the previous Government attempted to do just that with the notorious Fiscal Responsibility Act 2010. I looked up what Chris Mullin, the former Member for Sunderland, South, said about it in his diaries. In his entry for 5 January 2010, he writes that he came into the Chamber to listen to the debate, describing the proposal as:
“Surely the most pointless piece of legislation ever devised.”
He continued:
“To be fair to Alistair”—
the former Chancellor of the Exchequer, the right hon. Member for Edinburgh South West (Mr Darling)—
“this is not his doing. It shows every sign of having been dreamed up in the fun factory at Number 10. He managed to keep a straight face throughout as George Osborne shredded it mercilessly.”
We have come up with something somewhat better, because we need to demonstrate to the British people that the Government can be relied upon to tax and spend sensibly. The Office for Budget Responsibility will do exactly that. This fully independent body is bringing integrity back to the official forecasts. With full access to all the data, assumptions and economic models needed, the OBR is making the key judgments that underpin our economic and fiscal decisions.
Let me touch on the issue of independence, which a number of hon. Members raised. It is right that the OBR has access to all the numbers. We believe that the relationship with the Government strikes the right balance. The OBR will perform a core executive function in providing the official forecasts and a published assessment of the likelihood of the Government’s meeting their fiscal mandate, but it will do so independently of Ministers, with all judgments and methodology questions being at the complete discretion of the budgetary responsibility committee. That model has been supported by a range of external commentators, including the Institute for Fiscal Studies. It is also worth noting that Lord Turnbull said on Second Reading in the other place:
“What is proposed is a pragmatic and, in my view, well judged hybrid”.—[Official Report, House of Lords, 8 November 2010; Vol. 722, c. 22.]
The OBR will appoint its own staff and will have a budget responsibility committee confirmed by the Select Committee on the Treasury. That process of confirmation will ensure that the right staff are appointed to the BRC. The non-executives will be required to report regularly on the extent to which the OBR has been able to perform its duties, with complete discretion through the annual report. That is an important safeguard for the OBR.
Let me touch on Parliament’s role, which was raised by the hon. Member for Wirral South and my hon. Friend the Member for Macclesfield, who is a member of the Treasury Committee. The OBR will submit all its findings to Parliament, with each forecast and report being laid before the House, as was the case for the economic and fiscal outlook produced by the OBR in November. To ensure accountability, any written questions from hon. Members will be passed directly to the OBR, which will respond in the usual manner. All members of the budget responsibility committee, as well as the OBR’s non-executive directors, will also be available for Select Committee hearings. The evidence that OBR representatives have already given to the Treasury Select Committee has been widely welcomed by hon. Members.
I want briefly to mention the National Audit Office. As we have heard, the measures in the Bill largely reflect the provisions in the previous Government’s Constitutional Reform and Governance Bill. There was no time for the other place to consider those provisions before the general election, and this Bill represents the earliest opportunity to bring them before Parliament and to implement the recommendations of the Public Accounts Commission following its review of the National Audit Office’s corporate governance. This, too, has been welcomed on both sides of the House.
The provisions in the Bill will restore confidence and responsibility to our country’s fiscal framework. For too long, there was suspicion about the reputation of the forecasts produced by the Treasury: to put it kindly, they were suspected of optimism. What we now need is stronger institutions. We need to allow for expert scrutiny of the public accounts. We need improved economic governance, and much-improved transparency, and this Government are taking great steps towards achieving that. This is the right course of action for our economy, and for our country. I commend the Bill to the House.
Question put and agreed to.
Bill accordingly read a Second time.
Budget responsibility and national audit Bill [Lords] (programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Budget Responsibility and National Audit Bill [Lords]:
Committal
1. The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
2. Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Tuesday 8 March 2011.
3. The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Consideration and Third Reading
4. Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.
5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.
Other proceedings
7. Any other proceedings on the Bill (including any proceedings on consideration of any message from the Lords) may be programmed.—(Stephen Crabb.)
Question agreed to.
Budget responsibility and national audit Bill [Lords] (Money)
Queen’s recommendation signified.
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Budget Responsibility and National Audit Bill [Lords], it is expedient to authorise—
(1) the payment out of money provided by Parliament of any expenditure incurred by the Treasury or the National Audit Office in consequence of the Act, and
(2) the payment out of the Consolidated Fund of—
(a) amounts payable in accordance with remuneration arrangements made in relation to the Comptroller and Auditor General and the person who chairs the National Audit Office, and
(b) amounts payable in consequence of liability for breach of duty in relation to audits, examinations and inspections carried out as part of the Comptroller and Auditor General’s functions.—(Stephen Crabb.)
Question agreed to.
Budget responsibility and national audit Bill [Lords] (Ways and means)
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Budget Responsibility and National Audit Bill [Lords], it is expedient to authorise—
(1) the imposition of charges to corporation tax in relation to transfers of property, rights and liabilities, and
(2) the payment of sums into the Consolidated Fund.—(Stephen Crabb.)
Question agreed to.