Budget Responsibility and National Audit Bill [HL]

Lord Burns Excerpts

Monday 8th November 2010 Lords Chamber

[Lord Burns]

My Lords, I propose to address my remarks to those parts of the Bill that deal with budget responsibility. I, too, fully support the principle of publishing a charter for budget responsibility, including the objectives for fiscal policy and the means by which they would be attained. The challenge is to have a framework that both constrains fiscal behaviour in a responsible way and is capable of dealing with the range of surprises and unexpected events that inevitably occur. All attempts to frame budget responsibility in this way have at some stage met that particular problem—some have dealt with it better than others.

The main innovation in this Bill is the formation of the Office for Budget Responsibility. I agree that this has the potential to increase confidence in the projections and to reduce suspicion that they are modified by government to give the impression of a greater chance of success. I agree with the noble Lord, Lord Turnbull, that support for this independent scrutiny does not require a belief that there is widespread fiddling in fiscal projections. I also agree with him that there is a natural tendency for a Government to believe that their policies have a better chance of success than many sceptics will claim or, indeed, than often tends to be captured by the official forecasting process. Sometimes they are right. On other occasions, they are wrong. Sometimes, they are very badly wrong.

Given the natural degree of uncertainty and error in any projections of this kind, we should not overstate this problem. Interventions by government in projections tend to involve some bias towards optimism. However, it has to be recognised that some of that is to counterbalance a natural bias towards pessimism, sometimes among the officials in the department. We all agree that it is better to remove any doubts about this. I wholeheartedly support the idea of scrutiny and of having an independent office.

When the idea was first mooted, I, along with the noble Lord, Lord Turnbull, were rather attracted by the hope that it might be an audit process—or what he has called a validation model—and that its main role would be to test the validity of assumptions used in the forecast and to concentrate on the question of the prospect for the underlying public finances, taking into account the position of the business cycle. The Government have taken a different approach. This Bill involves outsourcing the responsibility for the published forecasts, including the main economic magnitudes as well as the public finances.

It is no secret that most of the Chancellors with whom I worked had the ambition to hand the responsibility for forecasting to someone else. That is not surprising, given the limitations and the inevitable range of error around any forecasts for output public spending and tax collection. For right or wrong, most Chancellors end up damning forecasts and the requirement to publish them. I will be interested to see whether this new arrangement ends that long history. Personally, I am not sure that having forecasts done somewhere else entirely solves the problem for Chancellors, but that is not the issue for today. The decision has been made. However, we should be in no doubt that forecasts are uncertain—sometimes very uncertain—and that any organisation that builds its reputation on the accuracy of its forecasts is going to have a difficult time on occasions, whether it is inside or outside the Treasury. I fear that that will also apply to the OBR at some stages.

This decision has some important implications for the structure and operations of the OBR. It is something that has to be considered when framing its remit and governance. Many of the details involved in preparing the forecast for the economy—particularly public finances—require a close working relationship with officials, particularly when it comes to public expenditure and taxation. Furthermore, as the Bill requires the forecast to be produced on Budget Day, the OBR has to be an insider as far as the Budget is concerned. Consequently, it will inevitably work closely with the Treasury, which I fear will make it more difficult to have a clear line of separation between the OBR and the Treasury. On occasion this will cause suspicion but I fear that it is a fact of life. Given the OBR’s responsibility in this regard, it is simply not possible to have the degree of separation that some people would like to see. It is an integral aspect of the decision to make the OBR responsible for the forecasts.

I emphasise the whole question of the OBR’s independence. I fear that this will not be secured by putting it into a different building, employing completely new people or giving it unlimited resources. Independence is much more about the quality of the people who are involved and depends crucially on the remit that is given, the clarity of that remit, the governance structure that surrounds the organisation and whether that enables us to see much more clearly the kind of job that it is doing.

To my mind, the biggest danger to the independence of the OBR is if it is dragged into the political debate through being asked to give an opinion on political issues or on issues that cannot be verified by outcomes. I strongly believe that, if these arrangements are to have any chance of working, the OBR should be required to limit its activities to assessing whether the Government’s objectives will be met. I am particularly concerned that it should not be involved in making judgments about hypothetical proposals or in making impossible comparisons with counterfactual outcomes. It should not be pulled into the political debate about the effects of alternative policy. Therefore, it is important that we should be clear not only about the things that it has to do but about the things that it should not be doing. For example, the OBR should not be asked to give a view on the effects of a Budget by comparing that with someone’s alternative Budget, or even with not having a Budget at all. It should not be asked to widen its remit or to give a view on the impact of packages of measures, whether framed by government or opposition. Therefore, like other noble Lords, I am concerned about the open-ended nature of Clause 6 and the ability to move the remit gradually over time, as clarity of remit will be crucial to the body’s success.

It was clear that the interim OBR was handed a virtually impossible task in presenting a pre-Budget forecast shortly before the Budget was published. That opened up the opportunity for analysts to try to interpret from the two what the effect of the Budget would be, which, of course, gets one into deep political debate. I hope that in the future this will not be the case. Therefore, I am anxious that there should not be remit creep. If there is any danger of this, it would be enormously helpful if it could be made clear by the Minister or in the Bill how far the remit can be stretched and what degree of discretion is left with the Treasury to change the remit given to the OBR.

My next point relates to governance. It is proposed to have a chairman and two additional persons who form the Budget Responsibility Committee and who are required to have relevant knowledge or experience. In addition, it is proposed to have at least two persons, who are described in the Explanatory Notes as “non-expert”, as part of that office. I do not find this distinction between experts and non-experts helpful, particularly in this area of forecasting and public finances. It is much more helpful to think of it in the terms mentioned by a number of noble Lords this afternoon—that is, the distinction between executive members and non-executive members of the OBR.

Clearly, the executive members—essentially, there are three experts—make up the Budget Responsibility Committee and are responsible for the published work. However, in my view the Bill should be much more specific about the role of the non-executive members. I suggest that they should not be involved with the published content but should be consulted if any issue of process emerges during the forecasting rounds. Similarly, they should be involved in post-mortems of how the process worked in relation to content and relationships with the Treasury and other relevant bodies. They can give guidance and support the independence of the OBR, if this question ever becomes an issue, and help the executive members to navigate their way through the inevitable issues that will arise from month to month in determining how the remit should work and how they should respond to pressures from the Treasury and to the whole variety of issues that people who have been non-executive directors know come before boards on a regular basis. They should also be involved in setting the OBR’s own budget and adding weight to any issues over resources that the OBR has. Along with a number of noble Lords, I would be grateful to hear from the Minister whether this type of interpretation accords with his view of the role of the non-expert members of the OBR. I agree with others that it would be helpful for the Bill to be much more specific about the role of the non-executive members.

This takes me to my final point, which relates to resources for the OBR. The main weakness of the proposed structure is the dependency of the OBR on the Treasury for resources, both financial and with regard to some of its people. I have no doubt that, in the early days, this will not be an issue, but it could become an issue. This could work either way. Public bodies that work without a budget constraint have a tendency to grow and grow. On the other hand, we know that one way of constraining the independence of any body is to leave it underresourced. Along with the noble Lord, Lord Myners, I agree that some transparency and safeguards need to be built in.

I would like a role to be given to the Treasury Select Committee in another place with respect to resources. For example, the budget for the OBR could be published and scrutinised by the Treasury Select Committee. The OBR should have the opportunity to set out to the committee whether it believes that it has the resources that it needs to meet its remit. If the chairman of the OBR thought that the OBR was being underresourced, there should be an opportunity to raise that question with the committee. Similarly, the committee could have the opportunity of testing whether the budget for the OBR was growing too rapidly. Simply having the finances of the OBR as a part of the Treasury’s expenditure programme may be all right on this occasion, but some years down the line it may not be quite such a comfortable process.

I end by noting that my former colleague, Alan Budd, showed typical wisdom and independence when faced with the difficult task of setting up the interim OBR. I have full confidence in Robert Chote’s ability to carry out this extraordinarily difficult role. The key to making a job of this type work is to be absolutely clear about its remit, the extent of that remit and the governance arrangements that surround it and to ensure the certainty of the organisation with regard to its resources. I fear that confusion in any of these areas will in the end be the biggest danger to independence and to the success of what otherwise I wholeheartedly support.