Budget Responsibility and National Audit Bill [HL]

Baroness Noakes Excerpts

Monday 8th November 2010 Lords Chamber

[Baroness Noakes]

My Lords, the Bill before us this afternoon is really two Bills dealing with the quite separate matters of the Office for Budget Responsibility and the national audit arrangements. The only thing that they have in common is their Treasury parentage, which in times past would not have been a good enough reason to have had only one Bill. I merely remark that it is a pity that the current Government have adopted the bad legislative habits of their predecessors.

Let me start with the OBR provisions. The OBR puts the UK leading the pack globally on fiscal transparency. We will now have a body that will issue independent fiscal and economic forecasts and give an independent verdict on whether the Government have achieved their fiscal mandate. I am sure that the Treasury civil servants who developed and manned the previous Treasury model over the years did an excellent job, but at the end of the day the Budget and PBR forecasts were determined by the judgments—or, as the noble Lord, Lord Turnbull, would have it, wishful thinking—of Treasury Ministers. The OBR is needed not to make the Treasury officials make better forecasts but to stop Treasury Ministers making bad ones.

In particular, I praise the formulation in Clause 5 that the duty of the OBR must be performed “objectively, transparently and impartially”. The noble Lord, Lord Eatwell, has tried to undermine that, but his criticism sounded more like sour grapes to me. When the Labour Party came to power, the then Chancellor claimed that he was committed to transparency, but I do not believe that he ever claimed to be objective or impartial—history will judge just how objective, transparent and impartial he truly was. I praise the courage of my right honourable friend Mr George Osborne in becoming the first Chancellor unambiguously to put judgments on the credibility of his economic and fiscal policies in independent hands. There will be no war of the Treasury's forecasts against those from outside the Treasury; there will be one clear, authoritative and independent judgment for the world to see.

That brings me to the first of my questions to the Minister. Another authoritative and independent voice in the land is the Bank of England, which also produces its own forecasts. Although those forecasts have a different aim—to support monetary policy—the forecasts inevitably cover much of the same territory. At present, there is a degree of co-operation between the Treasury and the Bank of England at working level, and a Treasury representative attends meetings of the Monetary Policy Committee. How is that expected to play out in future? Will there be any relationship between the OBR and the Bank of England as forecasts are developed? If so, how will this work in practice? If not, what is the Government's view of having two independent bodies that might have divergent views about the future economic path?

My second question—notice of which I have already given to my noble friend—concerns Clause 4. Clause 4(4) requires the OBR to produce two rather different reports each year, each of which seems to be similar to the reports that the Treasury has been producing since 2002. One of the required reports is to be on the sustainability of the public finances. The Treasury’s first Long-term public finance report: an analysis of fiscal sustainability in 2002 stated that the UK’s public finances are “sustainable in the long-term”, but by last year the equivalent report contained many references to challenges but no firm conclusions about sustainability. I have no doubt that, if the OBR had been in existence last year, it would have reported unambiguously that the public finances were not then on a sustainable footing.

The other report required under Clause 4(4) is rather different, as it will be an assessment of the accuracy of the OBR's own forecasts. My concern is whether it is right to give the OBR the responsibility to assess itself. Would that we had all been allowed to write our own school reports—how much easier life would have been. A parallel can be drawn with the Bank of England, which assesses itself each year on its forecasting performance. Earlier this year, the Financial Times said:

“Every August, the Bank does its own evaluation of its forecasting record and always pats itself on the back. This tiresome tradition arises since the Bank gives the forecasts extremely easy tests to pass”.

The FT's view was that,

“the Bank's forecasts are biased and have no information content at the forecasting horizon the Bank says is relevant for monetary policy”.

The Bank is judged ultimately on its monetary policy decisions and whether it delivers the inflation target set by the Chancellor rather than on the quality of its forecasts per se. However, the OBR’s core purpose will be to produce forecasts. Earlier, my noble friend reminded the House that the Treasury’s forecasting performance is poor, but that is not evident from the self-assessment that the Treasury produced each year. I hope that my noble friend will look again at whether the assessment would be better carried out by an independent person or body.

I have one final question on the OBR for my noble friend to comment upon. As other noble Lords have noted, tucked away in Schedule 1 are the detailed arrangements, which include having two members of the Office for Budget Responsibility in addition to the three with whom we are already familiar. The Explanatory Memorandum says that,

“These members … may assume the role of non-executives in the Office's governance”.

Why does the Bill not provide that they are to be non-executive members, as Schedule 2 does for the NAO’s members? I agree with the noble Lords, Lord Eatwell and Lord Newby, that their role should be better explained in the Bill. Can my noble friend also say why it is appropriate for the OBR to propose its own members? If the Government want them to be independent, why is there no independent appointments process? I have no problem with the Chancellor making the final formal appointment, but the important thing is that the process of selection must be demonstrably independent.

Lastly, my noble friend will be aware that the normal formula in the private sector is that the numbers of non-executives should be at least equal to the number of executive members. For non-departmental public bodies, it is generally provided that there is a numerical dominance of non-executives or that they are of an equivalent number, with an independent chairman. That is what Schedule 2 provides for the NAO. In the case of the OBR, there are to be three executives but only two non-executives. Can the Minister explain what model the Government are trying to create and why?

Although the majority of today's debate will focus on the OBR, we must not forget the changes that the Bill proposes to the Comptroller and Auditor-General and the National Audit Office. These clauses are a hangover from the previous Government's ill-judged Constitutional Reform and Governance Bill. I can quite see why the Government feel that it is necessary to press ahead with those reforms—not least because the substance of the restructuring has already taken place on a non-statutory basis—but I will offer a small commentary on the relevant clauses.

Before the National Audit Act 1983, there was a suspicion about the role of the Treasury in relation to the C&AG. The 1983 Act took the Treasury out of the picture, made the C&AG an officer of the House of Commons and created the Public Accounts Commission to oversee the NAO’s budget. When there was a fuss about the expenses of the C&AG more than 20 years later, the Public Accounts Commission commissioned a report from Mr John Tiner, who was then on gardening leave at the end of his service with the Financial Services Authority. Mr Tiner said that he was,

“not aware of the background to the C&AG being an officer of the House of Commons”—

that is, he did not know what he was talking about. As the Constitution Unit of University College London has pointed out, he made absolutely no assessment of the effectiveness of the Public Accounts Commission in carrying out its statutory role. Nevertheless, he concluded that the answer lay in the governance of the NAO and prescribed the usual formula of a board with a chairman and non-executive directors, which we have before us today. This was, of course, a convenient solution for those in another place to sign up to because it avoided any issues about the responsibility of the other place.

I recount that story to show how policy can be made at the highest level with relatively little real foundation. The failures of oversight of a component of the expenditure of the C&AG could have been dealt with relatively easily. Instead, the Bill will impose a costly and cumbersome superstructure of a board and non-executives. I have no criticism of the people who are undertaking those roles—they are excellent people—but do they add any real value to the process of public audit, about which there were absolutely no concerns? I doubt it. I hope that, before the Minister and his colleagues in the coalition Government pick up any more left-overs from the previous regime, they will in future examine critically whether changes are indeed necessary.