Monday 9th September 2024
(2 months, 3 weeks ago)
Lords ChamberBudget Responsibility Act 2024 View all Budget Responsibility Act 2024 Debates Read Hansard Text Watch Debate Amendment Paper: Committee of the whole House Amendments as at 4 September 2024 - (4 Sep 2024)
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, at the general election, our manifesto made it clear that sustained economic growth is the only route to improving the prosperity of our country, raising living standards, and sustainably funding public services. That is why it is our central economic mission.
On her first day in the Treasury, the Chancellor received new economic analysis from Treasury officials on the lost growth of the past 14 years. This analysis showed that, had the UK economy grown at the average rate of other OECD economies, it would now be over £140 billion larger. This could have brought an additional £58 billion in tax revenues in the last year alone—money that could have revitalised our schools, hospitals and other public services. We have therefore urgently begun the work to deliver on the mandate for change delivered by the British people at the election to fix the foundations of our economy, rebuild Britain and make every part of our country better off.
Our approach to growth rests on three pillars: stability, investment and reform. We have set out ambitious reforms, most importantly to the planning system, the single biggest obstacle to our country’s economic success. We have ended the ban on onshore wind and set out reforms to the skills system. With regard to investment, we have established the national wealth fund, committed to an industrial strategy council, and begun the creation of GB Energy. But the first, and most critical pillar, is economic stability—it is the rock on which all else must be built and the essential precondition for growth.
Over the last 14 years, with five Prime Ministers and seven Chancellors, instability has deterred investment, undermined family finances and, most importantly, held back growth. Many of the crises we faced during that time were of course global in origin—pandemic, war and an energy shock—but other countries faced those same shocks. The reason why we in the UK were hit harder than other comparable countries can be explained only by the choices made by the previous Government here at home: austerity, which choked off investment; a rushed and ill-conceived Brexit deal; and the disastrous Liz Truss mini-Budget, which crashed the economy and sent mortgage rates spiralling.
We believe that stability must begin with respect for our economic institutions. For much of the UK’s history, the strength of our economic institutions has bestowed credibility in international markets and underpinned our economic success. Politicians who seek to undermine those strengths, as we saw in the last Parliament, play a dangerous game. Under this Government, the Bank of England’s Monetary Policy Committee will continue to have operational independence in the pursuit of its primary objective of price stability, and, in line with our manifesto, we will support and strengthen the Office for Budget Responsibility, hence the Bill we are debating today.
The OBR was, of course, introduced by a Conservative Chancellor to deal with a lack of independence in forecasting and the problems that had caused. It was a commendable move, bringing greater transparency and independent scrutiny to fiscal policy. But while the previous Government then went on to undermine it—Liz Truss notoriously saying that she wanted to
“see the back of the OBR”—
the Labour Party continued to support it. Now, in government, we will strengthen it.
This Bill therefore fulfils a simple but important step to help restore economic stability: it brings transparency and independent scrutiny into law by ensuring that every fiscal event that makes significant changes to taxation or spending will be subject to an independent report from the OBR. In doing so, it delivers on a manifesto commitment.
Let us be clear about why this Bill is needed. While the existing fiscal framework requires at least two OBR forecasts a year, there is currently no requirement on the Treasury to subject announcements on all fiscally significant measures to independent OBR scrutiny. In effect, that means there are times when the Government can make fiscally significant announcements while opting out of both transparency and scrutiny. This was a key factor in the disastrous Liz Truss mini-Budget, which did so much damage to our economy and to households, who are still paying the price for it today.
The previous Government knew the measures they were taking were unfunded and unaffordable, but as they were not bound to a forecast, they wilfully prevented one from taking place. This absence of scrutiny was a key factor in the adverse market reaction that followed. As the now shadow Chancellor said at the time, the mini-Budget damage was in part
“caused by the lack of a forecast””.—[Official Report, Commons, 17/10/22; col. 395.]
This cannot be allowed to happen again, so this Budget Responsibility Bill takes five important steps.
First, the Bill requires that, before the Government make any fiscally significant announcement in Parliament, the Treasury must ask the OBR to prepare a report which takes that announcement into account. This builds on the existing process whereby the Chancellor commissions the OBR for an economic and fiscal forecast to accompany a fiscal event. It guarantees in law that, from now on, every fiscally significant change to tax and spending will be subject to independent scrutiny from the OBR.
Secondly, the Bill gives the OBR new powers independently to decide to produce a report if it judges the measures in a fiscal event to be fiscally significant. If a fiscally significant announcement is made without the Treasury having previously requested a forecast from the OBR, the OBR is required to inform the Treasury Committee in the House of Commons of its opinion, and then prepare a report as soon as is practicable.
Thirdly, the Bill defines a measure, or combination of measures, as “fiscally significant” if they exceed a specified percentage of GDP. The Charter for Budget Responsibility will then set the precise threshold. Setting the threshold in this way provides clarity for the OBR and external stakeholders about what constitutes a fiscally significant announcement and ensures that the Government can set it at the right level going forward, recognising economic conditions. The Treasury has published a draft of the updated charter. This notes that the threshold level will be set at announcements of at least 1% of nominal GDP in the latest OBR forecast.
Fourthly, the Bill ensures that these arrangements do not apply to Governments responding to emergencies. The Bill does this by not applying in respect of measures that are intended to have a temporary effect and which are in response to an emergency. The charter will define “temporary” as any measure that is intended to end within two years. This recognises that it is sometimes reasonable, as it was during the pandemic, for the Government to act quickly and decisively without an OBR report, if that is needed in response to a shock. Of course, in emergencies it may be appropriate for the Chancellor to commission a forecast from the OBR to follow measures that need to be announced or implemented rapidly, and that would happen in the usual way. Alongside any such announcement, the Treasury will be required to make clear why it considers the situation to be an emergency. As set out in the updated charter, the OBR will have the discretion to prepare a report if it reasonably disagrees.
Fifthly and finally, the Bill requires the Government to publish any updates to the detail of these arrangements, such as the threshold level at which they are triggered, in draft form at least 28 days before the updated charter is laid before the House of Commons. This is an essential safeguard in the Bill, preventing any future Government from choosing to ignore these arrangements by updating the charter without clear parliamentary consent. In line with this Bill, and as the Chancellor announced in July, she has commissioned a full forecast to accompany the Budget on 30 October, following the important principle that significant fiscal policy decisions should be made at a fiscal event and accompanied by an independent OBR report.
In the Chancellor’s July Statement to Parliament, and in light of the scale of the overspend left by the previous Government, of which the OBR has confirmed it had not been informed, she also announced additional measures to strengthen the fiscal framework. These require the Treasury to share with the OBR its own assessment of immediate public spending pressures, enshrining that rule in the Charter for Budget Responsibility and establishing that spending reviews will take place every two years, with a minimum planning horizon of three years, to avoid uncertainty for departments and to bring stability to our public finances.
The changes introduced in this Bill are an important step in bringing much-needed stability to our economy. By empowering the OBR and ensuring that an independent report will accompany all fiscally significant announcements, it will improve transparency and accountability. Economic stability is central to economic growth—objectives that I hope will be shared across your Lordships’ House. I beg to move.
Lord Frost (Con)
My Lords, I find this a peculiar Bill. There are a number of odd things about it.
First, as my noble friend Lady Noakes mentioned, it seems odd that this is a money Bill. I do not challenge the decision, obviously, but it does not seem to affect the Government’s powers to raise taxes or spend in any way. I cannot help but notice that, as far as I can tell, the original Budget Responsibility and National Audit Act, which created the OBR, was not a money Bill, so it is odd that this one is. I do not question the decisions on this point but it does seem odd; I agree that it would have benefited from more scrutiny.
This feels more a constitutional Bill in some ways, but it is weak there too. The Minister billed it as a lock on government actions, and others have described it as such, but it does not actually stop the Government doing anything; it only requires the OBR to write a report if they do so, so it seems misconceived in those terms too. One has to ask what the point of the Bill is. It is, of course, a process Bill, but it is also a political Bill. It is written entirely to give an opportunity for the Government and the Labour Party to contrast their activity with the Liz Truss mini-Budget and the decisions taken in 2022. We have heard plenty of that already in this House today.
I think Labour will find two problems with that. First, as my noble friend Lady Noakes has already mentioned, the Bank itself says that two-thirds of the problem was its own mishandling of the LDI crisis. It is hard to see how, if this Bill had been in force and a report had been required, it would have had any effect on that aspect of the autumn 2022 problems. The other problem that the Government will find is that the world does move on. Their own so-called fiscal black hole, which they have already spent a large time creating, is where attention will move. They may regret this Bill before long, to judge by the Niagara Falls of public money that seems likely to pour out of the Treasury in the months and years to come.
I do not think that we are meant to take this Bill seriously. Outsiders recognise that; the IFS itself says that the proposal is “largely performative”. Even the Resolution Foundation describes its impact as “relatively small”. The real impact of the Bill will be to reinforce the position of the OBR in the constitution, but I am doubtful about that for two reasons.
First, for some of the reasons that have been said, the OBR is not a particularly effective institution. It clearly reinforces the Treasury view of the world. It has a poor record, as others have said and as it itself acknowledges. It is negative about Brexit and it repeats the zombie 4%-cut-to-GDP figure that was produced six years ago on the basis of reports put together before we even left the EU. It is doubtful about incentives and what makes a free economy tick. Forecasting is difficult—people bring their priors to it—but the answer is not to do it better or do more forecasts; the answer is to remove the privileged status of the OBR and the forecasts it gives in our economic decision-making. That is the first reason.
The second is that this Bill forms part of the tendency over the past 20 to 25 years to tie down elected Governments with Platonic guardians who think they know better than Governments. This is an intellectual error that began, reasonably enough, with Bank independence in 1997, but it cannot be extended to every single situation. Just because it is good for running monetary policy does not necessarily make it desirable to have independent controls on fiscal policy, to give independence to one regulator after another or to give independence to institutions with wider economic policy effects, such as the Climate Change Committee and many others. These are very different things. You cannot solve the problems that the country faces by constantly giving further independence to unelected institutions and bureaucratic processes.
I am afraid that this error has time to run yet. It is sapping democracy and will make it more difficult to deal with new economic challenges. I hope that, one day, we will reverse this trend and look at this panoply of constraints on government action with a much more sceptical eye.
Lord Livermore (Lab)
My Lords, it is a pleasure to close this debate on the Bill. I am grateful to all noble Lords for their contributions and questions.
As promised in our manifesto, we will support and strengthen the Office for Budget Responsibility. This Bill delivers on that simple but important step to help restore economic stability by bringing transparency and independent scrutiny into law, ensuring that every fiscal event which makes significant changes to taxation or spending will be subject to an independent report by the OBR.
Let us remind ourselves why this Bill is needed. Although the existing fiscal framework requires at least two OBR forecasts a year, there is currently no requirement on the Treasury to subject announcements on all fiscally significant measures to independent OBR scrutiny. In effect, that means that there are times when the Government can make fiscally significant announcements while opting out of both transparency and scrutiny. As the noble Baroness, Lady Kramer, said, this was a key factor in the disastrous Liz Truss mini-Budget, which did so much damage to our economy and to households, which are still paying the price for it today.
The previous Government knew that the measures they were taking were both unfunded and unaffordable but, as they were not bound by a forecast, they wilfully prevented one from taking place. That cannot be allowed to happen again. This Bill takes five important steps, which, in combination, will deliver on that commitment.
First, it requires that, before the Government make any fiscally significant announcement to Parliament, the Treasury must ask the OBR to prepare a report which takes the announcement into account. This guarantees in law that, from now on, every fiscally significant change to tax and spending will be subject to independent scrutiny from the OBR. The noble Baroness, Lady Lawlor, suggested that certain announcements should have been accompanied by such a forecast under these arrangements, a question also raised by my noble friend Lord Davies of Brixton and the noble Baroness, Lady Vere of Norbiton.
I will look first at the Chancellor’s July Statement. It did not represent a change to the funding allocated to departments or to borrowing plans. This Bill is aimed at ensuring independent scrutiny of significant fiscal announcements that would represent risks to macroeconomic stability. The threshold is set at 1% of GDP or more in any year. None of the policy announcements mentioned by the noble Baroness would qualify as fiscally significant within the definition of the Bill. However, that 1% is of course cumulative, and, unlike the previous Government at the time of the disastrous mini-Budget, when they wilfully prevented a forecast from taking place, the Chancellor has commissioned the OBR to deliver a full economic and fiscal forecast, which will be presented alongside the Budget on 30 October. This is when the Government will set out their fiscal plans, including how they meet our fiscal rules, in the usual way.
My noble friend Lord Eatwell spoke about those fiscal rules, as did the noble Baronesses, Lady Wheatcroft, Lady Lawlor and Lady Vere, my noble friends Lord Sikka and Lord Liddle and the noble Viscount, Lord Trenchard. The Government’s manifesto set out robust fiscal rules which will ensure that the current budget moves into balance, so that day-to-day costs are met by revenues, and debt must be falling as a share of the economy by the fifth year of the forecast. The Chancellor will set out the Government’s full fiscal plan, including the precise details of those fiscal rules, in the usual way: at the Budget in October, alongside an economic and fiscal forecast produced by the OBR. A revised OBR charter will be published at that point.
To further address the point made by the noble Baroness, Lady Wheatcroft, I point out that the Chancellor said, in her Mais Lecture earlier this year, that she
“will report on wider measures of public sector assets and liabilities at fiscal events, showing how the health of the public balance sheet is bolstered by good investment decisions”.
The noble Lord, Lord Altrincham, asked about the costs of the asset purchase scheme. The OBR provides detailed projections of the underlying cost arising from QT and the impact on different fiscal metrics. The latest OBR forecast for the financial year 2024-25 put HMT transfers to the APF at £34.5 billion. The separation of fiscal and monetary policy is essential, so the Government do not comment on the conduct or effectiveness of monetary policy.
Secondly, the Bill gives the OBR the power to decide independently to produce a report, if it judges the measures in a fiscal event to be fiscally significant. The noble Lord, Lord Frost, raised the question of how much impact this Bill will have, a point also made by the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Vere. As my noble friend Lord Liddle said, we need look back only at the disastrous Liz Truss mini-Budget and at the current cost of the average mortgage—£300 a month higher than before that mini-Budget—to see how serious the impact of sidelining the OBR can be.
Of course, the noble Lord, Lord Moylan, is correct to say that the problems with that mini-Budget went much wider than just the absence of a forecast. As the noble Baroness, Lady Kramer, said, the announcement of £46 billion of unfunded tax cuts led to an unprecedented increase in borrowing costs. As a result, the value of sterling fell to a record low against the dollar, with a near collapse in the pension market. As my noble friend Lord Murphy rightly said, explicitly sidelining the OBR meant that no one knew how any of this would be paid for or how it would impact on the then Government’s fiscal rules. There is no doubt that this contributed to uncertainty in the markets. As the now Shadow Chancellor said at the time, the mini-Budget damage was, in part,
“caused by the lack of a forecast”.—[Official Report, Commons, 17/10/22; col. 395.]
The noble Baroness, Lady Vere, described this Bill as political theatre. However, what is particularly notable is the lack of an apology to the British people from the noble Baroness in her speech this evening for the damage that the Liz Truss mini-Budget did to family finances. I know that they are determined not to apologise, but I am not sure that is a wise strategy. As long as they refuse to do so, they may well continue to pay the electoral price for it.
To address the question from the noble Baroness, Lady Lawlor, and my noble friend Lord Sikka, this Bill will prevent the sidelining of the OBR by giving it the power to start an assessment if the Government announce fiscally significant policies without one. This means that the mini-Budget, and any other fiscally significant announcements like it, would have been subjected to the scrutiny of an independent OBR report. This Bill ultimately is about transparency and scrutiny.
The noble Lords, Lord Frost and Lord Moylan, and the noble Viscount, Lord Trenchard, whom I thank for his kind words, criticised some independent regulators. I respectfully disagree. This Bill ensures transparency and accountability. It does not give the OBR policy-making powers. As my noble friend Lord Sikka and the noble Baroness, Lady Kramer, rightly said, policy is very much for the elected Government. By adding a further level of scrutiny to fiscally significant announcements, this Bill takes nothing away from the power of this Parliament—in fact, greater transparency surely increases accountability. This Bill requires that policy-making is subject to proper scrutiny. Independent scrutiny of the public finances promotes greater accountability to the public, provides certainty for the markets and investors, and supports economic stability. We have seen what happens when the OBR is sidelined—higher interest rates and mortgage misery for millions.
The noble Baronesses, Lady Noakes and Lady Vere, raised the question of the OBR’s accountability. The OBR is accountable to Parliament. The Treasury Committee in the Commons can call in the chair and other OBR members, and both oral and written evidence submitted by the OBR are available on the Parliament website. It must also consent to the appointment of the OBR chair. In addition, a full update to the charter will be published on 30 October alongside the Budget, on which Members in the other place will vote in the usual way.
The noble Lord, Lord Macpherson, and my noble friends Lord Eatwell and Lord Liddle, noted that the Chancellor’s Statement in July set out robust reforms to further increase transparency in the public finances. In the light of the scale of the overspend left by the previous Government, mentioned by my noble friends Lord Hain and Lord Murphy, and the noble Baroness, Lady Wheatcroft, about which the OBR had not been informed, the Chancellor also announced additional measures to strengthen the fiscal framework. These require the Treasury to share with the OBR its own assessment of immediate public spending pressures, enshrining that rule in the Charter for Budget Responsibility and establishing that spending reviews will take place every two years, with a minimum planning horizon of three years to avoid uncertainty for departments and to bring stability to our public finances. The noble Lord, Lord Macpherson, asked about further reforms to the OBR, and I will of course look at his suggestions.
The noble Lords, Lord Altrincham and Lord Frost, and the noble Baroness, Lady Noakes, questioned the OBR’s forecasting record and some of the assumptions that the OBR makes. As my noble friend Lord Chandos said, this Bill concerns the scrutiny and transparency around fiscally significant announcements. However, I note that the IMF has said that the OBR’s analysis
“can be considered as best-practice, and could be used as a benchmark by other advanced countries”.
Meanwhile, the OECD has described the OBR as a
“model independent fiscal institution”.
The OBR’s forecasts for GDP and the public finances have typically been more accurate than the previous forecasts made by the Treasury. As the noble Lord, Lord Altrincham, said, the OBR is required by primary legislation to publish an annual assessment of the accuracy of its forecasts. All previous forecast evaluation reports are available on the OBR’s website.
The third element of this Bill is to define a measure or combination of measures as “fiscally significant” if they exceed a specified percentage of GDP, with the OBR charter then setting the precise threshold at 1% of GDP. The noble Lords, Lord Macpherson and Lord Bilimoria, and the noble Baroness, Lady Vere, discussed the setting of the 1% threshold. The purpose of the legislation is to ensure that large-scale fiscal announcements that could undermine macroeconomic stability cannot take place without independent scrutiny. This requires a threshold that is targeted at fiscally significant announcements. The current threshold will ensure that the provisions are triggered only when appropriate to support macroeconomic stability.
To answer the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Vere, the 1% of GDP threshold is cumulative and treats savings and costs separately. This means that announcements made by government to Parliament in any financial year in the forecast period can be added together and trigger these arrangements. It will not be possible to simply announce savings to offset costs to avoid it. The Treasury will keep track of announcements as they are made over time and share these with the OBR as requested. This is an important part of how these arrangements will hold the Government to account on spending commitments.
Fourthly, this Bill ensures that measures do not apply to responses to emergencies. The Bill does this by not applying in respect of measures that are intended to have a temporary effect and which are in respect of an emergency. The OBR charter will define “temporary” as any measure that is intended to end within two years. In an emergency—for example, during a pandemic such as Covid-19—it may be necessary for the Government to take rapid action. In these cases, it would not be appropriate to hold back the response to the emergency until such time as a forecast could be produced.
My noble friend Lord Davies of Brixton and the noble Baronesses, Lady Kramer and Lady Vere, sought clarity on the definition of “emergency”. Given the unexpected and unpredictable nature of events, it is not possible to set out a precise definition of an emergency in legislation. However, the Bill contains clear limitations to ensure that no Government can inappropriately avoid independent scrutiny on its significant fiscal announcements.
The first of these limitations is that the updated Charter for Budget Responsibility notes that, when the Treasury believes something is an emergency, it would need to make it clear why it considers the situation to be an emergency. Secondly, this can be relevant only for temporary measures which are intended to end within two years. Thirdly, as set out in the updated charter, this will not simply be for the Treasury to decide. The OBR will have the discretion to prepare a report if it reasonably disagrees on whether the situation in question is an emergency. If it were to reasonably disagree, the OBR would be required to notify the Treasury Committee in the House of Commons of its opinion. I repeat that, in emergencies, it may be appropriate for the Chancellor to commission a forecast from the OBR to follow measures that need to be announced or implemented rapidly. That would happen in the usual way.
Finally, the Bill requires the Government to publish any updates to the detail of these arrangements, such as the threshold level at which they are triggered, in draft form, at least 28 days before the charter is laid before the House of Commons. This is a key safeguard in the Bill, preventing any future Government from choosing to ignore these arrangements by updating the charter without clear parliamentary consent.
The noble Baroness, Lady Noakes, and the noble Lords, Lord Moylan and Lord Bilimoria, raised the question of scrutiny of this Bill in your Lordships’ House. As the noble Baroness, Lady Noakes, and the noble Lord, Lord Frost, noted, this is for the Speaker in the House of Commons to determine under the Parliament Act 1911. This Bill focuses on the scrutiny of fiscally significant announcements—tax and spend—which is the remit of the other place. To reassure the noble Viscount, Lord Trenchard, the House of Commons will debate and approve the updated charter.
The changes introduced in this Bill are an important step in bringing much-needed stability to our economy, so that we never again see a repeat of the disastrous Liz Truss mini-Budget and the damage that it did to family finances. By empowering the OBR and ensuring that an independent assessment will accompany all fiscally significant announcements, it will improve transparency and accountability. Economic stability is the rock upon which all else must be built; it is the essential prerequisite for growth. This Bill is an important step as we fix the foundations of our economy, rebuild Britain and make every part of our country better off.