(13 years, 7 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (Justine Greening)
I beg to move,
That the Charter for Budget Responsibility, a copy of which was laid before this House on 4 April, be approved.
I welcome the opportunity to bring forward the charter for budget responsibility for the approval of the House. The charter sets out the Government’s new fiscal framework following the passage of the Budget Responsibility and National Audit Act 2011. I will start by setting out the context for the reformed framework.
Following the general election last year, the coalition Government inherited the largest budget deficit in our peacetime history, which was forecast to be the largest in the G20. Our structural deficit was the largest in Europe. The fiscal situation that we inherited was unprecedented, so on coming into office, the challenge that we faced as a new Government of two parties working together to resolve the problems left by the Labour party was to bring order back to our nation’s finances. The new fiscal framework contained in the charter is at the heart of that task. We published a draft of the charter in November last year, which provided time for substantial scrutiny. Indeed, it was considered at all stages of the passage of the 2011 Act. Perhaps before I get into the details of it, it would be helpful if I set out the Government’s broader fiscal aims.
We believe that fiscal policy should restore sustainability to the public finances. That is essential so that we can reduce our vulnerability to shocks or a loss of market confidence, underpin private sector confidence, support growth and avoid an irresponsible accumulation of debt at the expense of the next generation. We have taken tough and decisive action since taking office, and of course last May, the immediate reduction of in-year spending brought us much-needed breathing space given the acute sovereign debt concerns across Europe.
The emergency Budget in June was the moment when credibility was restored to Britain’s public finances, and in the 2010 Budget my right hon. Friend the Chancellor set out the Government’s fiscal mandate, which is now, for the first time, included in a statutory document, which is the charter that we are debating tonight. That mandate requires the Government to balance the structural current deficit by the end of the rolling five-year forecast period, and it is supplemented by a target for the public sector debt ratio to be falling at a fixed date of 2015-16.
The measures that we set out in the emergency Budget, alongside the departmental allocations that we set out in the spending review, represent a comprehensive four-year plan to meet that fiscal mandate. The 2011 Budget reaffirmed the Government’s consolidation plans set out last year, and reinforced them by implementing a balanced set of tax and expenditure policies. In the assessment of the Office for Budget Responsibility, we are currently on track to meet the mandate and the supplementary debt target one year early, in 2014-15.
Mr John Redwood (Wokingham) (Con)
Does the Minister recall that the decision was taken in the March Budget to increase both spending and borrowing by £34 billion over the following four years? Will she remind the House why we did that?
Justine Greening
We are introducing a series of measure that will, over time, tackle our underlying structural deficit. My right hon. Friend makes the point that in the meantime we need to borrow to pay off the structural deficit, which the country will continue to have until we have been through the process of fiscal consolidation. Until our nation’s finances are in balance, we face a challenge, because debt interest payments will continue to increase. If we had not taken the action that we are taking, we would have the added problem that the rate of interest on that debt would also increase. It is important that we get a grip on the debt interest rate that we are paying, that we tackle the problem now and that we do not leave the problem of debt and the fiscal deficit to future generations. We need to get into a position in which the debt is affordable, because it is currently squeezing the availability of money to spend on the public services on which we all depend. It is critical that we continue with that plan.
Angel Gurría, the secretary-general of the OECD has urged our country to “stay the course”, which is precisely what we will do. Our plan has been praised by the international community and welcomed by the financial markets. As I have said, that will hopefully enable us to keep those interest rates lower for longer. Both the International Monetary Fund and the OECD went from issuing warnings and cautions to the UK regarding economic management under the previous Government to calling this Government’s measures essential and courageous. This Government’s decisive action has therefore taken Britain out of the financial danger zone, and the crucial first step in that process was restoring the credibility of our fiscal policy by replacing the fiscal framework. The charter sets out the new framework before Parliament and for the public.
Perhaps I should remind the House why the Government set up the Office for Budget Responsibility. The previous Government’s forecasts for economic growth over the past 10 years were, on average, out by £13 billion, and their forecasts of the budget deficit three years ahead were, on average, out by £40 billion. Those forecasting errors were almost always in the wrong direction. In fact, all the previous Government’s forecasts for borrowing for more than two years ahead since Budget 2000 underestimated the eventual figure. It is vital for credibility and confidence that the forecasts for the economy and public finances are produced independently, which is why we established the OBR.
In June 2010, the interim OBR produced an independent assessment of the economy and public finances ahead of the emergency Budget. Then, at the Budget, the OBR produced a revised forecast on the basis of the consolidation measures announced by the Government. In November, the OBR produced its economic and fiscal outlook under the leadership of Robert Chote, whose appointment last year was scrutinised and confirmed by the Treasury Committee.
We have moved the OBR on to a permanent status that is underpinned by primary legislation. The 2011 Act establishes in statute the provisions necessary to secure the OBR’s independence, and it received Royal Assent on 22 March. The permanent budget responsibility committee led on the production of the OBR’s March economic and fiscal outlook, which was published alongside the Budget 2011.
The origin of the charter lies in the 2011 Act, which requires the Government to prepare a charter relating to fiscal policy and the management of the national debt, just as with the previous code for fiscal stability. However, the 2011 Act enhances the requirements for the charter compared with the code, because it provides that the charter must formally set out the Government’s fiscal objectives and mandate. The charter must in addition specify the minimum contents of the Budget report. The 2011 Act states that the charter may include guidance to the OBR on how it should perform its duties. Finally, the 2011 Act requires the Government to lay the charter before Parliament. The charter fulfils all those requirements, consistent with the 2011 Act and the remit of the OBR.
The first part of the charter covers the Government’s fiscal framework. It sets out that the Government’s two fiscal objectives are first to ensure sustainable public finances that support confidence in the economy, promote intergenerational fairness and ensure the effectiveness of the wider Government policy, and secondly to support and improve the effectiveness of monetary policy in stabilising economic fluctuations.
As we have heard, the Government’s fiscal policy mandate is a forward-looking target to achieve cyclically adjusted current balance by the end of the rolling five-year forecast period. At this time of rapidly rising debt, that mandate is supplemented by a target for public sector net debt as a percentage of GDP to be falling by a fixed date of 2015-16. That will ensure that the public finances are restored to a sustainable path.
Crucially, the charter cannot simply be ripped up and rewritten whenever is convenient for a Government. Instead, if the Treasury wishes to alter the mandate, it must follow the formal process set out in primary legislation and return to the House for approval, which enhances the Government’s accountability to the House for their fiscal targets. The charter reiterates the Government’s intention also to adopt as the official forecast the OBR’s economic and fiscal forecast, and if the Treasury wishes to disagree with the OBR’s forecast, it will have to explain why to Parliament. Finally, the charter sets out the Government’s debt management objective and how they will set and report on their financing remit. The charter covers each element of the Government’s fiscal policy framework in a statutory document that the House has the ability to approve, enhancing the Government’s accountability for their fiscal policy.
I turn now to the second part of the charter. It is an important part of the charter that provides guidance to the OBR on its role and duties. The OBR’s main duty, as set out in the 2011 Act, is to examine and report on the sustainability of the public finances. The OBR has complete discretion over how it carries out its statutory duties, and the 2011 Act makes it clear that in all its work the OBR must be objective, transparent and impartial. As part of this independence, the OBR has the freedom to decide the methodology that it uses, the forecast judgments that it takes, the contents of its documents and its work programme for future research and analysis. This independence is delivered through the 2011 Act and therefore protected in primary legislation.
The purpose of this part of the charter is to set out extra detail on the OBR’s statutory responsibilities within the scope of the legislation. The charter requires the OBR to produce forecasts that cover at least five financial years, that provide sufficient information to allow the Government to use them as a basis for policy decision and that include all the Government’s announced policy decisions. The OBR must also set out the key assumptions that underpin its forecasts. In fact, it has already published far more detail in its assumptions and judgments than previous Budget and pre-Budget reports. The 2011 Act ensures that this will continue in future publications, while the charter provides further detail on the set of economic variables and fiscal aggregates that the forecasts should include.
Of course, at this time of heightened uncertainty, the charter also sets out that the OBR must be clear about the risks that it has factored into its forecasts. The OBR forecasts result in an assessment whether the Government are on track to meet their fiscal mandate, and the charter also sets out that the OBR independently scrutinises and certifies all the policy costings that feed into its fiscal and economic forecasts. Importantly, the 2011 Act ensures that the OBR has a right of access to all Government information it requires to deliver its remit.
As well as medium-term forecasts, the OBR will look to the longer term. As we have heard, the OBR has a duty to report on the sustainability of the public finances. It will therefore produce an annual fiscal sustainability report that will include long-term projections of the public finances covering the next 50 years. The first report is due out on 13 July. The charter sets out that as well as those projections, the report will include an assessment of the public sector balance sheet. The OBR will also analyse its forecasting performance, drawing lessons for future forecasts from the inevitable differences between its forecasts and out-turn data.
Finally, the charter provides guidance on a number of administrative questions on the timing of interaction between the Treasury and the OBR. These are necessary to ensure that the complex Budget process runs smoothly while preserving the OBR’s freedom to act independently. There is also a memorandum of understanding agreed between Robert Chote, as chair of the Office for Budget Responsibility, and other Departments to support their working arrangements. The charter restates and reinforces the independence of the OBR, and none of the guidance undermines its impartiality or objectivity.
This charter lies at the heart of our reformed fiscal framework. It strengthens institutional arrangements, reinforces the independence of the OBR and restores credibility and confidence to the public finance forecasts.
Kerry McCarthy (Bristol East) (Lab)
I will bypass the first eight minutes of the Minister’s speech, in which she reiterated the usual mantra about everything being Labour’s fault—she usually resorts to that when questioned about the Government’s policy, but today she started her speech with it—and instead focus on the charter.
The Budget Responsibility and National Audit Act 2011 was passed with consensus, at least on the principle of setting up the Office for Budget Responsibility and introducing the changes to the national audit process that the previous Government had already floated and that we would have implemented had we been re-elected in 2010. There was consensus on the principle, if not on all the details that we discussed in Committee. We welcome the fact that the House is debating the charter in Government time, as we received assurances in the Public Bill Committee that it would do so. Indeed, that formed a central part of our debates on the Bill and it is a central facet of the Office for Budget Responsibility’s functioning and relationship with the Government.
However, I note that the Government have on previous occasions attempted to get this motion through on the nod at the end of the day’s business. Only after efforts made by the Labour Opposition to secure a debate do we now have the opportunity to talk about the charter, which rather goes against the spirit of the reassurances that were given in Committee. Indeed, I questioned the Minister repeatedly in Committee about what was meant by the phrase “laid before Parliament” and whether such a promise would mean—not just on this occasion, but on future occasions—a proper debate on the Floor of the House or the measure being put through on the nod. However, at least we are here now, with the opportunity to discuss the issue.
Debates on the Bill in Committee were, as I pointed out at the time, slightly hampered by the fact that we could discuss only the draft charter. I repeat my observation that it would have been better for the Committee—and for the House on Report when we approved the Bill—to have a finalised form of the charter for consideration. I note, however, that the final version laid before Parliament has not changed substantially, which is somewhat unfortunate, as it has not been improved as much as we had either been led to believe in Committee or had hoped for.
Chapter 1 of the charter refers to section 6(2) of the 2010 Act and confirms that
“the Charter may not make provision about the methods by which the OBR is to perform its duty,”
which is an additional provision. That is important and crucial to the OBR’s independence. However, we pressed for the final version of the 2010 Act or the charter to guarantee complete discretion on what the OBR can consider, as well as how. Regrettably, as I shall set out later, that has not been included. Chapter 2 has not been changed substantially, although we welcome the inclusion of other Departments in the memorandum of understanding with Mr Robert Chote, on behalf of the OBR, and the Treasury, which recognises that the work of Her Majesty’s Revenue and Customs and the Department for Work and Pensions in particular is similarly pivotal to responsible fiscal policy and sustainable public finances.
Given the importance of the memorandum to the transparency, objectivity and impartiality of the OBR, it is only right that the House should consider it. We therefore welcome the Treasury’s publication of the memorandum. The document refers to the forecast liaison group. Given the Government’s professed commitment to guaranteeing the transparency and independence of the OBR, will the Minister confirm that the Treasury will publish the minutes of the group meetings? If a dispute is escalated to the chair of the OBR or the permanent secretaries, will a Minister report to the House on the cause of the dispute and how they intend to solve it? Finally on the memorandum, it states:
“Analysis of the direct impact of Government policies on the public finances will be provided to the OBR for independent scrutiny which will state whether the OBR agrees or disagrees with the Government’s costings”.
Such analysis is one of the fundamental roles of the OBR, yet neither the memorandum nor the charter explains the consequences of the OBR’s assessment contradicting the Government’s own report. I will come later to the worrying implications if the Treasury were to disregard the OBR’s verdict.
We also discussed in the Public Bill Committee the possibility of duplication and inconsistencies in OBR and Bank of England forecasts. Neither the charter nor the memorandum addresses that, and the Minister has previously advised that it would be for the two organisations to formalise their relationship in this respect. Perhaps she could update us on any discussions that the Treasury has had with the two organisations on their roles, and indeed on how the Chancellor intends to proceed in the event of a disagreement between the two.
Mr Redwood
Perhaps it would be a good idea if there were such a disagreement, because the Bank of England has been so bad at forecasting inflation, and we hope that the OBR will be a bit better at it.
Kerry McCarthy
The Bank of England’s forecasts have not always been as accurate as one might have hoped, but that proves my point: there could well be conflict between the Bank’s forecasts and the OBR’s forecasts. It is therefore right to ask what the Government would do in such circumstances. Would such a disagreement discredit the Bank of England’s forecasts? Will the OBR be seen as the ultimate arbiter on such matters, or will the Government be able to pick and choose whichever forecast suits their purposes?
Chapter 3 of the charter and the Government’s objectives for fiscal policy are obviously at the core of the document. Some of the provisions in the charter might not be entirely necessary, however. For example, it places the Treasury under a duty to prepare a Budget report for each financial year, which one would hope would happen without it being told to do so. We acknowledge, however, that including the Government’s fiscal mandate in the charter and consequently requiring any modifications to be laid before the House is a welcome step. We hope that it will enhance Government accountability, although that should not be taken as an endorsement of the Government’s economic policy or of their fiscal policy objectives.
Regrettably, given that economic growth has flat-lined under this Government and that forecasts have repeatedly had to be downgraded, it remains to be seen whether the Government are meeting their stated objectives—particularly that of supporting confidence in the economy. Nevertheless, we approve of the idea of working towards maintaining confidence in the economy. The charter rightly acknowledges that achieving that must be the responsibility of the Government and not of the OBR.
The second objective, that of promoting inter-generational fairness, is much more contentious, and it has been challenged here and in the other place. It is not at all clear from the document what the Government mean by the term, although from the Minister’s comments tonight and on previous occasions, I assume that it refers to passing debt from one generation to another, rather than to passing on wealth, advantage and opportunity from one generation to another. If that is indeed the case, and the objective refers simply to inherited debt, it would appear that the Government under this Chancellor’s leadership have an exceptionally narrow conception of fairness which does not chime with most people’s understanding of the world.
We should not be surprised by that, however, given the Government’s record on fairness to date. A Government who choose to take £7 billion of much-needed support from children in their first Budget and comprehensive spending review—three times the amount that they thought appropriate for bankers to pay—who choose to target women for spending cuts, who choose to penalise people on lower incomes, and who choose the regressive measure of increasing VAT can hardly be considered fair.
Earlier today, many of us met constituents supporting the Hardest Hit campaign for people with severe disabilities and chronic illnesses, and I would ask the Government to explain to them how making people with disabilities and chronic illnesses pay the price for the financial crisis is fair. One of the constituents I met today is registered blind and has a guide dog, but she has been told that she is not eligible for the higher rate of disability living allowance. She used to work for a bank, and she wants to know why she is paying a bigger price for the financial crisis than her former bosses in that industry.
Steve Baker (Wycombe) (Con)
I am surprised that the hon. Lady does not realise that the financial crisis is the product of deficit, debt and debasement—in other words, Government policy.
Kerry McCarthy
The financial crisis was global and it started in the US. Is the hon. Gentleman suggesting that the banks did not play a role in creating that financial crisis and that people such as my constituent, who are struggling to get by on disability living allowance and a modest income, were responsible for it?
Steve Baker
I know that the crisis originated in the banks, but it did so because of currency debasement, which was a result of deficit spending—a Government policy.
Kerry McCarthy
We cannot get into a whole debate about macro-economic policy. Needless to say, I disagree with the hon. Gentleman’s analysis of how the financial crisis occurred. The point I was making—the intervention was not particularly relevant to it—was that this Government’s action in reducing the deficit too far and too fast is hitting people at the bottom end of the income scale far harder than it is hitting people such as bankers. If the Government were to adopt our suggestion of introducing a banking bonus tax again this year, as we did last year, they would not have to make cuts that hit people at the bottom so hard.
Justine Greening
I find the hon. Lady’s comments ironic in a debate welcoming a charter that sets out some guidelines on the operation of the Office for Budget Responsibility—an independent group of forecasters who have looked at and then provided input into distribution analysis showing that the richest people have borne the greatest burden of deficit reduction. I do not understand how we can have that debate on the one hand, yet hear the hon. Lady saying on the other hand that the burden has fallen on the most vulnerable. This Government have worked hard to protect the most vulnerable.
Kerry McCarthy
I shall come in a few moments to some of the Government’s measures that have done precisely the opposite of what the hon. Lady claims. Will the Minister explain why thousands of people with disabilities—people in wheelchairs, people with chronic illnesses and so forth—were protesting outside Parliament today under the banner of the Hardest Hit campaign, supported by reputable charities? Is she saying that being hit by what the Government are doing is a figment of their imagination?
Chris Ruane (Vale of Clwyd) (Lab)
Does my hon. Friend think that those blind people and deaf people and the people in wheelchairs who were protesting today are ungrateful to the Tory Government for what they have done?
Kerry McCarthy
That certainly seems to be the suggestion. For some, it seems that they should be thankful as they do not realise how well off they are. The Minister has come close to saying that they have “never had it so good” under this coalition Government.
We talked in Committee about the Child Poverty Act 2010, and the Government have since published the child poverty strategy. We pressed for a wider remit for the Office for Budget Responsibility to include scrutinising the Government’s progress under the Act. Although the Government rejected our amendment in Committee, I hope that the Office for Budget Responsibility will consider the proposals again in due course, as tackling child poverty is a crucial element of inter-generational fairness. It is disappointing that the Government do not seem to recognise that. I hope that the OBR will be afforded the necessary discretion to include this aspect in defining its role.
It is highly disputable whether the Government have any mandate from the country for their fiscal policy, especially given that the Deputy Prime Minister led his party into the general election on an entirely different approach. Although setting out fiscal objectives has its advantages, it is clear that the Government are bringing in their targets far too early and cutting spending far too fast, as is demonstrated in the forecast that they will need to borrow £46 billion more than was planned last year because of their failure to promote economic growth successfully. That should prove to the Government that their fiscal mandate is not appropriate to the current economic climate and that a different approach is needed to secure the economy on a sustainable footing. That explains why it is key for the OBR to make wider reference to still fundamentally important economic determinants such as employment and growth.
Ensuring a responsible fiscal policy is clearly beyond the OBR’s remit; instead, it is this House’s responsibility to try to make the Government take heed of its advice. For that reason, the charter’s assertion that the Government
“retains the right to disagree with the OBR’s forecasts”
is a serious concern, especially when reliable forecasts will be so crucial to the forward-looking targets. The Government have made a great song and dance about how the OBR will enhance the credibility of fiscal forecasting because of its independence from the Treasury, and the charter itself states:
“The OBR is designed to address past weaknesses in the credibility of economic and fiscal forecasting and, consequently, fiscal policy”.
However, enabling the Treasury to disregard independent official forecasts would make a mockery of the fundamental purpose of the OBR. It would also lead to dangerous uncertainty about which official forecasts we can and cannot believe, and which should inform fiscal policy. That is relevant to a point raised earlier by the right hon. Member for Wokingham (Mr Redwood). I urge the Minister to clarify the status of the OBR and its forecasts.
According to chapter 4 of the charter, the role of the OBR is to
“examine and report on the sustainability of the public finances.”
During the passage of the Budget Responsibility and National Audit Act, a number of attempts were made to secure a broad definition of sustainability, and to persuade the Government to acknowledge that it was not enough to focus on the deficit in an insular way while ignoring the impact on economic growth, employment, inflation, and other factors that are central to sustainable finances and responsible fiscal policy.
Although the Government rejected our amendment which sought to guarantee a multi-dimensional approach to sustainability, arguing that the OBR should be able to define the concept, the Minister reassured the Public Bill Committee that she intended
“to amend the charter to require the OBR to set out how it will approach sustainability in each of its reports.”––[Official Report, Budget Responsibility and National Audit Public Bill Committee, 1 March 2011; c. 48.]
We therefore welcome the addition of paragraph 4.7 in the final charter, which confirms that
“The OBR will consider a wide range of factors and dimensions relating to the sustainability of the public finances and will be transparent in its approach. More generally, in each report published under its main duty, the OBR will explain the factors taken into account when preparing the report, including the main assumptions and risks.”
That reflects many of the concerns raised in both Houses. The reference to risks is important, given that the Government appear to be blinkered when it comes to the risks that are inherent in their deficit reduction plan.
We are also pleased that chapter 4 refers to projections of GDP, inflation and the labour market. However, the absence of any complementary references in chapter 3 to the Government’s role, or indeed the Act, remains highly disconcerting. It suggests that the Government do not consider such fundamental considerations to be part of their role. I assure the Minister that promoting employment and growth are part of the Government’s responsibilities. Perhaps, in time, the OBR will help them to understand that. More positively, we welcome the inclusion of paragraph 4.13, which confirms the Office’s access to Government information, and the omission of the definitions of “objectively”, “transparently” and “impartiality”, which are terms that the OBR is best placed to define.
We are slightly concerned about the inclusion of paragraph 4.12, which is an additional provision and which states:
“The OBR should not provide normative commentary on the particular merits of Government policies.”
There is a fine line between giving an impartial and informed assessment of the effectiveness of Government policies in achieving the declared objectives, and being seen to pass judgment on their merits. How does the Minister think that such a provision will be policed, and who will be the arbiter of whether the OBR has overstepped the mark?
There is no reference in the charter or the memorandum to the funding of the OBR, which we argued in Committee was critical to its independence, but the charter does refer to the office’s discretion in regard to the timing of its publications, although that seems to be weakened by the requirement for
“a regular and predictable timetable”.
The fact that there have already been doubts about whether reports have been published in time for Prime Minister’s Question Time reinforces the need not only to ensure that the wording of the charter is sufficient but, more important, to ensure that it is followed in both the letter and the spirit.
Our key reservation is that neither the Act nor the charter includes any means of ensuring enforceability. I have already mentioned the get-out clause that allows the Chancellor to ignore the OBR’s reports, but there is also no indication of the consequences of the Chancellor’s failing to meet his obligations under the charter. Will the Minister commit the Chancellor to reporting to Parliament following OBR publications? Most important, will she commit the Treasury to listening and responding to OBR reports in its actions as well as its words?
It is not enough for the Office for Budget Responsibility to tell us whether the Chancellor is acting responsibly—we know that he is not—and it is certainly not responsible to disregard its advice or forecasts, but neither the OBR nor the charter can do anything about that. Only the Chancellor can, and he must realise that a charter that proclaims the credibility of economic forecasting does not remedy the damage caused by the Government’s policies, and does not automatically translate into credible policy.
David Rutley (Macclesfield) (Con)
It is an honour to speak in this debate. It may not be the best attended debate, but I believe that in future years we will look back at the charter and the creation of the Office for Budget Responsibility as a major step forward in the way we manage this country’s fiscal policy.
Mark Twain once said that prophecy—or, in this case, economic forecasting—is
“a good line of business, but it is full of risks”,
and in respect of certain Governments it is sometimes said that statistics, and even forecasts, can be used in the same way as
“a drunken man uses lamp posts—for support rather than illumination.”
I therefore welcome the creation of the OBR, as I believe it will bring far greater transparency to the forecasting process and the management of our public finances.
I want to refer back to what my hon. Friend the Economic Secretary said in her opening remarks, and to talk a little about why the charter and the OBR needed to be set up. The sheer scale of the recent economic crisis led many people to recognise the need to rethink how forecasting is conducted. It was also clear that Governments can be tempted to indulge in wishful thinking, and there was too much of that in the run-up to the credit crunch. Even Lord Turnbull in evidence to the Treasury Committee spoke about how it had existed during successive quarters of economic growth. Despite what has been claimed, it is the case that promises were made about an end to boom and bust, yet there was a boom and there certainly was a bust. As a result, we clearly need to improve our approach to forecasting.
In the current digital age, there is greater demand for transparency in many areas, and that must include in the development of forecasts for our economy and public finances. I therefore welcome the Chancellor’s bold and important move to transfer the power to create such forecasts to the OBR. That will bring greater objectivity to bear, and the forecasts will hold Governments of all shapes and sizes to account, which is definitely in the long-term interests of our economy.
The creation of the OBR has also strengthened the credibility of the Government’s efforts to tackle the current deficit and bring the UK economy back to sustainable economic growth, and I have been encouraged by the comments of some highly respected bodies in this field. The Institute for Fiscal Studies says:
“The decision to transfer responsibility for official economic and public finance forecasts from ministers to economic experts is a very welcome one. It does not guarantee that the forecasts will be accurate, but it will reassure people that they reflect professional judgement rather than politically motivated wishful thinking.”
That is important. The OECD says:
“The OBR will support the consolidation process, improve the quality and credibility of information and lay a sound basis for the forward-looking framework.”
Finally, the International Monetary Fund says:
“The OBR complements the government’s commitment to fiscal discipline by enhancing the transparency and credibility of the budget process and helping inform policy decisions.”
The “credibility” that is mentioned in just about each of these quotes is a vital commodity. It will build confidence in the debt markets and help to address the costs of funding our enormous burden of debt, and it will build confidence in businesses, and in their investment decisions. It will be vital in helping to bring about significant and sustained growth.
As a former member of the Treasury Committee, I was fortunate enough to have been able to participate in the appointment of Robert Chote as chairman of the OBR and the other members of the budget responsibility committee. Giving the Treasury Committee the power of consent over appointments and dismissals was another welcome move by the Chancellor, and has given Parliament a far greater say in these all-important matters.
The good news is that there has been very encouraging initial progress. The OBR has created thorough forecasts and supporting analysis, which has been welcomed on both sides of the House. It has become an important reference point in a very short period of time. It is vital that it builds on that reputation. I am pleased to see that more forecasts and reports are planned, including, as the Economic Secretary mentioned, the fiscal sustainability report that will be published later this year to give a truly long-term view of the future of our public finances. That is most welcome.
In conclusion, I hope that these short remarks have conveyed my strong support for this charter, and for the creation and clear processes of the OBR. It is a vital achievement which will bring about greater transparency, credibility and confidence in the forecasting process, and it represents a structural change in the management of our fiscal policy. The OBR will play a vital role in helping to bring the deficit back under control and to move this economy to sustainable growth. I wish the OBR every success in its endeavours, and I trust that the Treasury Committee will ensure that it gets the support it needs to carry out its important tasks and hold future Governments to account for many decades to follow. I fully support the motion.
Mr John Redwood (Wokingham) (Con)
Like all those who have participated in this debate, I welcome the four principal aims identified in chapter 3 of this document. It is exactly right when it says that we need to
“ensure sustainable public finances that support confidence in the economy”.
We see all too many examples within Europe of what happens to countries that lose the confidence of world markets and the world’s bank managers. We see that far from being able to sustain high and rising public spending, such countries end up with far worse cuts, which can be deeply damaging to their public services and social fabric. The Greeks seem to be getting into ever bigger difficulties the more money that is lent to the country on soft terms and the more that their Government fight to contain the deficit. We want to avoid getting into that vicious circle in which a Government raise taxes and cut spending, and the deficit grows because the economy plunges again and the revenues dry up even more. I think that hon. Members on both sides of the House now agree that it is most important that we undertake the work to ensure sustainable public finances.
When I listen to the debate in this House, I sometimes feel that very few people have read the numbers in the Red Book. The Government’s pathway is to borrow more than £480 billion extra over the five years for which they are planning. That is more than the total state debt 10 years ago; it is a massive sum. Some people think that we are going to be paying off the debt or paying off the deficit, but we are not.
This Government have, for understandable reasons, decided that they need to increase public spending in each of the five years of this Parliament so that the impact of their decisions on public services can be gentle—I hope that in many cases it will not be felt in any bad way. As a result of that understandable decision, this massive borrowing has to be undertaken and the public debt will be so much greater at the end of the period. That makes it very important that we stick to the pathway of getting the deficit down, so that each year we borrow a bit less extra than the year before. That is the aim of the strategy. Some people seem to describe it in rather different and more draconian or alarmist ways, but the Government are simply trying to cut the rate of increase in the debt. If all goes well over five years, we will still end up making a far bigger increase in the debt than the total state debt just 10 years ago.
I am delighted that the second aim given in this document is to
“support and improve the effectiveness of monetary policy in stabilising economic fluctuations.”
It is my view that the boom and bust were primarily created by a very badly managed monetary policy over the previous seven to eight years. We had the boom phase, when money was too easy, interest rates were too low and credit expanded too rapidly. Even worse, we had the bust phase, when the market was cleared of liquid funds, when interest rates were too high, and when the then Government were far too tight and jeopardised the financial system itself by pursuing a ridiculously tight money policy at the very point when it was obvious that banks were at risk and the system was in danger of collapse.
Chris Ruane
Will the right hon. Gentleman refresh the House’s memory on his advice to the previous Government on the regulation of the banks?
Mr Redwood
I can indeed and I am glad that the hon. Gentleman did not dare to repeat the normal falsehood that has often been put about. The advice we gave was that they did not have enough regulatory control over the cash and capital of the banks, that they needed tougher regulation of cash and capital and that their mortgage regulation of process and customer was worthless and would not prevent disasters in the mortgage market. I rest my case: that is exactly what happened. The mortgage banks were not protected by their regulation—it probably made things even worse—and the then Government failed to regulate the things that did matter that could have prevented the crisis. I hope that the hon. Gentleman is put right on that now and will no longer read out the stupid spin lines from the Labour party created by people who clearly had not read the economic report to which he is referring. I was trying to keep this non-partisan, but he has decided to spoil the tone—
Chris Ruane
So was I. I was giving the right hon. Gentleman an opportunity.
Mr Redwood
I am grateful then. I did not realise that the hon. Gentleman was being so generous.
If we are going to support and improve the effectiveness of monetary policy, I hope the Government will think through how that will work. It is one thing to have a charter to say that we will do this, which is something about which I am very relaxed—it is a laudable aim—but it is another to ask how it will occur. The problem with the conduct of monetary policy—this applied to the previous Government as well as to this Government—is that it is not entirely in the hands of the Treasury. I happen to believe that it is ultimately the responsibility of the Chancellor and the Treasury to conduct an honest money policy that avoids undue booms as well as bankruptcies and busts. That requires judgment.
The main elements of that policy, however, are conducted at the moment by the Financial Services Authority, which determines how much banks can lend and admits it got it wrong in the boom period. I think that the FSA also got it wrong in the bust period and managed to go with the cycle, thereby reinforcing it, rather than leaning against it as it should have done. We also have the Bank of England setting interest rates and having some involvement, but not sole control, over how much money is printed. The Chancellor and the Treasury do not run the whole policy and that could become a problem again in the future if the independent bodies make a mess again, as they clearly did in the boom and bust phases we have recently lived through.
I hope a little more thought will go into how the charter can be implemented. I am sure that my hon. Friend the Minister will agree that whatever the theory about independence might be, as far as the electorate is concerned the people responsible for the state of the economy and therefore the conduct of monetary policy are the elected officials—the Ministers. If Ministers wish to delegate that responsibility to an independent body, they are entitled to do so and the public will be happy with that all the time it works but extremely unhappy if the independent body gets it wrong.
That brings me to my third point. Although I am happy with the aims and principles of the charter, I would caution the Minister that we should not place too much confidence in independence as the only virtue that is needed to get these things right. We have had an experiment with a so-called independent Bank of England for more than a decade now and that has been our worst decade for boom and bust since the 1930s. That is not entirely the responsibility of the Bank of England but it was part of the team that managed to preside over too much boom, too much credit and too much inflation and then over too little credit, too little liquidity and bankruptcies on a scale that none of us in this House had ever seen before. That shows that independence is no guarantee of success.
We also see from the Bank of England that its inflation forecasts have been way out for quite some time—
Mr Redwood
I am coming to the growth forecasts, if the hon. Gentleman will be patient. The Bank’s inflation forecasts might perhaps have helped to mislead the previous Government as well as the present one. Those forecasts assumed that we would be somewhere around 2% when of course we have reached 5% or more on the retail prices index and 4.4% on the consumer prices index. Today, we have had another revision to the inflation forecasts from the Bank of England saying that there might be more inflationary pain to come over the summer of this year before we start to see progress back to somewhere near the 2% target.
I wish the Office for Budget Responsibility every success and hope that it will be more successful in its forecasts than the Bank of England has been in recent years. Today, the Bank had to announce not only an upward revision to this year’s inflation but a downward revision to this year’s growth. The OBR has already had to revise down its near-term year’s growth forecast in March of this year compared with its autumn forecast last year.
My worry about the current forecasts is that the assumption that we are going to have three years of above-trend growth over the balance of this Parliament after next year could be optimistic if the world economic slow-down, which is likely next year, continues for any length of time. If the euro crisis gets worse and creates more financial and economic turmoil among our major industrial trading partners on the continent or if there are unforeseen problems with the rate of slow-down in the emerging market economies, which are currently applying tough monetary medicine to try to curb their inflation, it could be that much more difficult to hit those Budget targets. That is all important, because we have as a third aim the laudable idea of a forward-looking target to get the current balance or deficit down and to get a better balance between revenues and expenditure.
I have explained that the five-year strategy assumes a very substantial cash increase in total public spending—around £94 billion from memory—and higher public spending on current account in the last year, compared with Labour’s last year, over this five-year Parliament. The way in which the deficit comes down in the official forecasts is mainly through a big increase in tax revenue. That big increase partly reflects the higher VAT rate and other higher tax rates that have already been imposed, but it mainly reflects the very good growth prospect in which we have three years of well-above-trend growth in the last three years of the period, accelerating from now onwards to that good performance. If there is any disappointment or need for downward revision by the OBR, that is going to throw out the tax revenues and we will therefore be faced with a bigger deficit that will require handling. We hear much debate in the House and in the media about whether the Government are trying to reduce the deficit too quickly, but the House should understand that there are risks the other way as well. If growth and tax revenue do not come through at the scale anticipated, we will be faced with rather more invidious issues to resolve about how to get the deficit down without that great super-boost from the revenue.
The objective for debt management is to minimise over the long term the cost of meeting the Government’s financing needs, taking into account risk. This is exactly the point I am trying to stress in this short debate. So far, the markets like the Government’s strong stance. They are pleased that the Government have regarded deficit reduction as the No. 1 thing they have to do and they are pleased with the OBR’s independent forecast showing that the rate of increase in debt drops off quite nicely over the five-year period. However, they will not be pleased if there is major slippage or if the OBR has been too optimistic, so it is most important that we have the right people in the OBR, that it has good fortune with its forecasts and that it has taken into account the possibility, for example, of a deterioration in the international background, which could have an impact.
In conclusion, I welcome the aims but I hope that the Treasury will consider the following important points. First, we must understand that just because a body is independent, that does not mean it gets things right. The Treasury will have to operate its own scepticism about the forecasts. If the OBR were too optimistic, it would be wise of the Treasury, at least privately, to have done some work on what might happen if the forecasts were too optimistic. One should not always assume that the OBR forecast is the worst case and that life is likely to be better. The Treasury should be very careful about that.
Secondly, the Treasury should do some contingency planning in case the world economy is worse than anticipated and has an impact on growth rates. Thirdly, it should take the opportunity that will be presented by the new regime for controlling the banks, which will be introduced when many powers are passed to the Bank of England, to say that the Treasury and the Chancellor must have a role in all that because it was definitely the regulation of banks and the bad conduct in monetary policy that gave us the huge pain of the past six or seven years. We probably need more intervention from the Treasury and more accountability to the Treasury to try to get the system to work in the future.
The Opposition love to say that the crisis was a global crisis and that therefore one should not blame any particular part of the UK governing establishment. I do not take that view. It was a largely western crisis and there were some advanced economies that were not affected by it. Australia had a particularly good period, China had a pretty good period, and India sailed right through without any problems. There were small and big economies that were not affected by the world crisis, even though global activity was hit, because American, British, Spanish and Irish activity was hit in a very predictable way.
It was a rather limited number of countries that had gross mismanagement of their money supply and their banking systems. As the election is well behind us, we should, in a non-partisan spirit, analyse what went wrong, admit that things went wrong in Britain, and make sure that the new architecture, of which the charter is just part, functions much better than the old architecture. That means questioning the assumption that independent people always get it right. It means understanding the ultimate accountability of the senior elected officials, and it means understanding that sometimes we need to be more pessimistic, at least in our private forecasts, so that we do not discover that our plans do not work.
Justine Greening
With the leave of the House, I shall sum up the debate and respond to some of the points that have been made. I thank hon. Members for their contributions. As I said at the start of this evening’s proceedings, it is essential that we restore the sustainability of the public finances. My right hon. Friend the Member for Wokingham (Mr Redwood) set out clearly the challenges that we face in doing that, the steps that we are taking and why they are so important.
The hon. Member for Bristol East (Kerry McCarthy) asked about the relationship between the OBR and the Bank of England and their ongoing discussions. Ultimately, it is for the OBR to decide how it wants to work with the Bank of England. It must make those decisions on its own and carry them out independently. The OBR’s forecast will be used as an official forecast for the Government. As the hon. Lady knows, that is provided for in the Budget Responsibility and National Audit Act 2011 and in the charter. She asked what would happen if the Chancellor of the day did not agree with the OBR forecast. He would have to come to the House and explain why not, and he would be accountable. That is one of the safeguards that we put into the Act, and it will strengthen the OBR’s role.
The hon. Lady raised concerns about paragraph 4.12, about the OBR not providing “normative commentary”. We had the debate in Committee and as the Budget Responsibility and National Audit Bill passed through Parliament. It is critical that we preserve the OBR’s impartiality by ensuring that it never gets dragged into political debate on specific policy measures. Paragraph 4.12 puts that beyond doubt.
I take this opportunity to reassure my right hon. Friend the Member for Wokingham. He spoke about ensuring that the OBR does its job, not just in terms of what it is meant to be doing, but in terms of the quality. As he knows, the Act—the relevant schedule—provides for the OBR to have non-executive members. It will periodically have an external review of its effectiveness. Aside from the normal scrutiny mechanism, the House can ask the Treasury Committee to examine the effectiveness of the OBR. So those safeguards will be in place to make sure not only that the OBR operates as intended and operates independently, but that there will be scrutiny of the quality of its work. One of the reports that it must publish periodically is its own assessment of how effective it is at forecasting.
With those safeguards in place, the charter, along with the Act, restores confidence and credibility to the public finances. It sets a reformed fiscal framework before Parliament and the public and complements the Act by providing extra detail on the OBR’s duties within the scope of it.
My hon. Friend the Member for Macclesfield (David Rutley) talked about his role on the Treasury Select Committee. I think that he was wise to point out that the Committee has a unique role, in relation to other Select Committees, because it will have a role in appointing members to the budget responsibility committee. That is an important role that will also strengthen the OBR’s organisation and its evolution over time.
The OBR has complete discretion over how it performs its statutory duties. It will make its own judgments on the economy and public finances and will use its own methodology to produce forecasts. It will make its own assessment of the Government’s performance against the mandate. The charter reinforces that independence and, by providing greater clarity on the interaction between the Treasury and the OBR, sets out the OBR’s key relationships and how it will work with the Treasury and other Government Departments. The charter reiterates our intention to adopt the OBR’s economic and fiscal forecasts as the official forecasts, as we have done since last May.
The hon. Member for Bristol East asked whether the Chancellor will respond to those forecasts as they come out. He has in fact responded with an oral statement to every forecast the OBR has published to date. Compared with the code for fiscal stability introduced by the previous Government, the charter provides a greater degree of accountability before Parliament for the fiscal framework. It requires us to set out formally our fiscal objectives and mandate before Parliament and specifies the contents of the Budget report. The hon. Lady said that it is obvious that there will need to be a Budget report, but I still think that it is important to have that clearly set out. Many people expected the previous Government to get on with the ordinary course of business by having a comprehensive spending review, but of course that was cancelled. Therefore, I think that it is important to put what seem to be normal assumptions about how a Government should approach things into the charter, which is precisely what we have done in relation to the Budget report.
In conclusion, the charter reflects our commitment to restore order to the public finances. It sets out our fiscal objectives and mandate for parliamentary approval. It strengthens governance arrangements and institutions and reinforces the independence of the OBR.
Question put and agreed to.
Resolved,
That the Charter for Budget Responsibility, a copy of which was laid before this House on 4 April, be approved.