Equality
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Lord Sassoon
My Lords, the Government take extremely seriously the question of fairness, which is why we introduced for the first time a distributional analysis to show the effects of not only our Budget but also our spending review decisions. In the measures that we have announced so far, in what is a very difficult fiscal situation, there is a fairness premium of £7.2 billion. The Government are putting these issues centre stage. In relation to bankers’ pay, my right honourable friend the Chancellor of the Exchequer has announced today that the levy on banks will be brought forward, so that the banks will be taxed at a higher level than under the previous Government’s one-off spending plans. We will await further developments in relation to discussions ongoing with the banks.
Lord Eatwell
My Lords, in the noble Lord’s reference to his Government’s policy on this matter and to the Budget, was he not being a little misleading, as the equality analysis in the Budget included the measures introduced by Mr Darling in March? When the measures introduced by the coalition are taken alone, they do not contribute to greater equality.
Lord Sassoon
My Lords, we took some very difficult decisions about which of the previous Government’s measures we would continue with and which we would not. The principal measure of the previous Government that we did not continue with was the full national insurance tax—the jobs tax—which would have been a significant drag on the growth prospects of this economy. Of course it was right that we should take into account the distributional effect of the total package of measures that we put through as a Government this year in the Budget and in the spending review. That is just what we have done.
Budget Responsibility and National Audit Bill [HL]
Lord Eatwell Excerpts(13 years, 5 months ago)
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Lord Eatwell
My Lords, the passage of the Bill through your Lordships’ House has been an excellent example of the importance of this House as a scrutinising and revising House. On behalf of these Benches, I thank the Treasury Bill team; Miss Jessica Levy from my office, who managed most of the relationship with the Bill team; and the Ministers, notably the noble Lord, Lord Sassoon, for the way in which they have approached the discussions and constructive negotiations on the content of the Bill.
The Office for Budget Responsibility established by the Bill is a peculiar institution. It is both outside government and of government. We need to ensure that legislation provides a framework for its independent operation as far as possible. That is what, working together, we have managed to do. We have clarified the role of non-executives, we have removed the statements in the Bill that seemed to qualify independence, we have enabled the OBR to consider issues of national risk, and we have enabled a process of external review of operations.
A number of factors remain. We on this side of the House are not entirely content with the budgetary provision for the OBR, or with the role of the charter as a qualifying agent that qualifies the OBR’S independence and instructs it.
The Countess of Mar
May I ask the Leader of the House whether it is normal to make a speech like this on the Question whether the Bill do now pass?
The Chancellor of the Duchy of Lancaster (Lord Strathclyde)
It is unusual, but it is in order. I think that the noble Lord, Lord Eatwell, is about to wrap up his remarks, but he was being constructive and helpful.
Lord Eatwell
I am indeed. It is appropriate to thank people, when a Bill has gone through in this co-operative manner, for what has been achieved.
I know that the Government think that this side of the House has taken a somewhat belt-and-braces approach to the independence of the OBR; I am sure that Sir Humphrey, or perhaps Sir Nicholas, does. However, it can do no harm to the OBR’s reputation to have a belt in place when the braces fail.
It is the Government’s responsibility now to ensure that this important experiment in economic governance is a success. We on this side wish Mr Chote and his team well.
Lord Myners
My Lords, my words are very much in the same direction as my noble friend’s. This has been a superb example of the House working well. We had long and detailed discussions in Committee. The Minister listened attentively and reserved his position, but came back with constructive amendments, and at all stages he kept fully informed everyone who is interested in the Bill by writing to us and keeping us up to date. It is a better Bill as a consequence of the House working effectively in the way that it did.
Currency Markets
Lord Eatwell Excerpts(13 years, 5 months ago)
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Lord Sassoon
My Lords, I think that we had better see how this plays out. It is encouraging that the European financial stability fund was able to make a successful bond issue at the end of last month. There was something like €45 billion of demand, which, in the technical phrase of the markets, was considered a blow-out—a hugely successful deal. That brings into question whether the terms can in any way be softened, but we had better wait to see how this evolves.
Lord Eatwell
My Lords, the noble Lord has said on numerous occasions to the House and again today that the stability of the eurozone is in Britain’s best interests. He has also told us today that Britain will participate in the design of the new stability mechanism. Will he tell us whether Britain will participate fully in the operation of the new stability mechanism, once designed, or will we continue to hover irrelevantly on the sidelines when Britain’s interests are at stake?
Lord Sassoon
My Lords, I have been completely clear, as has my right honourable friend the Chancellor of the Exchequer on numerous occasions, that while we wish to see a stable eurozone, which is indeed in Britain’s best interests, we will not be a part of the new permanent European stability mechanism, which is a matter for the eurozone countries. However, that does not mean that we are not rightly concerned, as I have just explained, to make sure that the stability mechanism is established in an appropriate way. Just as we played a constructive role in relation to Ireland, we will continue to play a constructive role in relation to all these matters as we go forward.
Banking: Royal Bank of Scotland
Lord Eatwell Excerpts(13 years, 5 months ago)
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Lord Sassoon
My Lords, the Royal Bank of Scotland is due to announce its results on 24 February. It normally makes its remuneration disclosures on or around that date, so we will have to wait. I have no knowledge of the number of bankers who might or might not be getting particular levels of bonus. Our relationship with the Royal Bank of Scotland is managed on a commercial, arm’s-length basis through UK Financial Investments.
Lord Eatwell
My Lords, as has been well-publicised, the Treasury and the Chancellor of the Exchequer have been entering into negotiations with the banks on bonuses and other activities. Will the noble Lord give me a categorical assurance that the results of those negotiations will in no way prejudge, constrain or compromise the findings of the committee into banking structures headed by Sir John Vickers?
Lord Sassoon
My Lords, with regards to the proposed possible settlement with the banks in Project Merlin, discussions are ongoing with the intention of seeing that the banks pay smaller bonuses than they would otherwise; that they are more transparent about their pay; that they make a greater contribution to local communities and the regional economies; that they treat customers fairly; and that they lend, materially and verifiably, more than they were planning to the businesses of Britain—especially small and medium-sized enterprise—so that they can grow and create this year. If we do not get such a settlement, my right honourable friend the Chancellor has made it clear that nothing is off the table. As to the Independent Commission on Banking, it is an independent banking commission and it will do its own thing as it sees fit.
Monetary Policy Committee
Lord Eatwell Excerpts(13 years, 5 months ago)
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Lord Sassoon
My Lords, I am grateful to my noble friend because, while again I will resist the temptation to second-guess the Bank of England, it has indeed attributed the recent rise in inflation, which has been significantly to the depreciation of sterling, to the increase in VAT which the last Government put in place and to the rise in energy prices. These are external factors.
Lord Eatwell
My Lords, the noble Lord in his Answer earlier referred to temporary factors accelerating inflation and reducing the living standards of the British people. Is not one of the most important temporary factors that are accelerating inflation through the rest of this year the increase in VAT to 20 per cent?
Budget Responsibility and National Audit Bill [HL]
Lord Eatwell Excerpts(13 years, 5 months ago)
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Lord Eatwell
My Lords, this is a rather heterogeneous group of amendments. In fact, the only common theme that I can see running through the amendments is that most of the ideas in them were proposed by the Opposition in Grand Committee. We are delighted that the Government have accepted many of the arguments made by this side concerning important failings in the Bill as originally introduced.
An essential difficulty with the structure of the OBR is that the OBR is to be both outside government and yet of government. The goal of the Bill is to make the OBR independent—a goal that we on this side fully support—yet, as the provider of the official forecast, the OBR is an essential part of policy-making and must be closely involved with the development and costing of government programmes. As the draft charter states,
“The Government will have full and timely access to information and assistance from the OBR”.
A very obvious manifestation of the resultant ambiguities is that the Treasury is planning to retain forecasting skills in order that Ministers may make informed judgments on the impact of various policies. As the noble Lord made clear in Committee, this may lead to the extraordinary situation in which the Treasury could reject the official forecast. Such paradoxes are the inevitable outcome of the peculiar, ambiguous status of the OBR.
Given this peculiar status, it has been the objective of this side of the House to reinforce the independence of the OBR wherever we might. After all, if there is not widespread confidence in that independence, the legislation will have failed. To that end, I am pleased that the Government have—in the form of Amendments 1, 2 and 4—accepted our argument that the non-executive members of the OBR should be given clear roles, including, most importantly, that of guardians of the independence of the OBR and, as we shall see in later amendments to be considered by the House, that of securing third-party monitoring of the OBR’s performance. We are pleased to support Amendments 1, 2 and 4.
There are two other important amendments in this heterogeneous group—I am sure that, listening to the Minister introducing the amendments, noble Lords might have been rather puzzled about why they are in a single group. Following suggestions made by this side and by the noble Lord, Lord Newby, Amendment 11 clarifies the previously obscurantist Clause 5(3). Will the Minister confirm that Clause 5(3) as amended will ensure that the evaluation of the relevant government policies will essentially be part and parcel of all the OBR’s work, including the work outlined and defined in the charter?
Amendment 12 is an acceptance of our argument that it is preposterous that the Treasury should, via the charter, be able to qualify the meaning of the requirement for the OBR to perform its duties “objectively, transparently and impartially”. I am delighted that the amendment will remove that nonsense. Will the Minister make it clear that the remaining requirement—which is, so to speak, all that is left—in Clause 6, which provides that the charter
“may include guidance to the Office about how it should perform its duty under section 4, including (in particular) guidance about … the time at which it is to prepare any forecast, assessment or analysis”,
can now refer only to the time at which the OBR should perform its duties under Clause 4? Do any wider, unspecified powers of direction remain? It would helpful if the Minister could clarify that, since Clause 6 will now have been changed to such an extent that it is not entirely clear what subsection (3) now refers to when it refers back to subsection (1).
Finally, in Amendment 13 the Government have responded to our criticism about the lack of adequate parliamentary scrutiny of the charter by requiring that a draft of any modification be published 28 days before the charter is laid before Parliament to be approved by resolution of the House of Commons. This is an important improvement on what went before, but even so—as the noble Lord, Lord Newby, said in Committee—the charter is subject only to vestigial parliamentary scrutiny. The important word in this context is “vestigial”.
That raises an important issue mentioned in the notes distributed with the amendments for the Report stage. Noble Lords will recall that several elements of the charter came in for stiff criticism in Grand Committee, yet the notes that accompany this stage declare that the revised charter will be published only after the Bill has received Royal Assent. That cannot be right. The failure to provide a revised charter deprives Members of another place of the opportunity to relate the charter in the Government’s preferred form to their substantive discussion of the Bill. In effect, this is the Government stifling debate on the charter. Will the Minister give me an assurance that this underhand way of going about things will be rescinded and that the revised charter will be published in good time for its consideration by another place?
Lord Newby
These government amendments are welcome because they recognise the discussions held in Committee. The Minister has a gone a long way towards responding to the concerns that were expressed.
I am particularly pleased with Amendment 11 because we spent a lot of time on this issue. Clearly, the original drafting was inadequate. Pride of authorship means that I am unhappy that the words that I suggested in Committee are not being used, but the wording in Amendment 11 will do exactly the same job, so I welcome that.
I also welcome Amendment 13 for the reasons suggested by the noble Lord, Lord Eatwell. I have some sympathy with his last point. I cannot see why the charter cannot be presented in its final form before the Bill goes through another place. I cannot believe that there will be much to change—the charter is not a very long document—so, for the reasons given by the noble Lord, that would be an improvement on what is currently proposed.
I want to make a final comment on what the noble Lord, Lord Eatwell, said about the Treasury retaining its own forecasting ability and what would happen if there was a dispute with the OBR. We discussed at some length in Committee why it was essential that the Treasury should retain it own forecasting abilities While it would clearly be a major source of embarrassment if the Treasury disagreed with the OBR forecast, the one good thing about the new system is that, presumably, any such disagreement would be transparent because the Treasury would have to explain that it has disagreed with the OBR and give reasons why, and there would no doubt be a huge row about it. Although that might be uncomfortable for the Government, that will at least expose all the issues that are in dispute. In the interests of transparency, surely that is a good thing.
Lord Sassoon
My Lords, producing high-quality work requires the OBR to have access to all relevant information and expertise. The Bill provides for this through a right of access to information, a Budget Responsibility Committee of experts and a duty to act transparently. In response to the discussion in Grand Committee, these arrangements are intended to be bolstered by the two amendments that we are bringing forward.
Amendment 3 gives the non-executives a duty to keep under review the processes that the OBR uses to assure that it is producing the best possible work. These are likely to be management processes that the non-executives will be well placed to consider. Examples might include: whether the OBR is consulting with a wide and appropriate range of experts, including academics and internationally; whether it is working effectively with the rest of government to produce analysis; and, to make sure that it follows up lessons from internal reviews.
Amendment 5 requires the non-executives committee periodically to commission independent expert reviews of the OBR’s work. In detail, it needs to consider frequency: these reviews could be carried out at times considered appropriate by the non-executives, but “at least” every five years. In scope, the review will consider work published in the relevant period. The non-executives will determine which of the OBR’s reports are to be considered. That could be all the OBR’s work or a particular theme could be focused upon. This flexibility is important to ensure that maximum value is always gained from the reviews. There is then the question of the reviewer. The non-executives would appoint a person or body with the appropriate knowledge or experience to carry out each review. Although we expect the reviews to have minimal costs, there is provision in the Bill for the OBR to make payments to the reviewers—for example, for their expenses. Each review will be published and a copy laid before Parliament. I beg to move.
Lord Eatwell
My Lords, I think that everyone who took part in Grand Committee will feel that these amendments should be dedicated to the noble Baroness, Lady Noakes—who I am afraid is not in her place to hear this—as it was she who, at Second Reading, raised the issue of writing one’s own school report and the necessity of having an independent assessment of the OBR’s performance. Amendments 3 and 5 therefore establish the responsibility of the non-executives to keep under review the activities of the OBR, relative to its main duty. An important component of this monitoring will be the commission of the third-party reviews of the OBR’s performance, as described by the Minister.
We are entirely supportive of the Government’s amendments in this respect, other than in one crucial aspect. Amendment 5 proposes that an assessment by an independent person or body should be carried out,
“at least once in every relevant 5-year period”.
The final part of the amendment, proposed in new sub-paragraph (7), says,
“the period of 5 years beginning with 1 October 2010”.
However, as will be evident from Amendment 6, which I shall be moving, we on this side think that five years is too long a period. First, as a professional economist, I feel that five years is much too long for an organisation to be running before its activities are assessed independently. After all, the OBR will be producing more than one report a year—in fact, there will be three or four reports—so within three years there will be a substantial body of material for an independent assessor to consider. The independent review will also have value for the OBR. It will provide informed third-party input into its techniques and procedures, and postponing that for five years will unnecessarily weaken the expertise that feeds into the OBR’s work. Of course, expert appraisal of the OBR’s activity will also be an important input into parliamentary scrutiny, and I think that in parliamentary terms we should want more regular consideration than is provided by this amendment.
That parliamentary element leads me to the second reason why five years is too long. Setting a five-year appraisal period politicises a process that should be entirely apolitical. If the Government secure the constitutional reforms that they have proposed, five years will be the length of a fixed-term Parliament; hence the OBR review will become part of a five-year political cycle. Indeed, as I emphasised to noble Lords just now with regard to proposed new sub-paragraph (7) in the amendment, the timing has been set carefully so that a review takes place just after the next election. Review of the work of the OBR should be divorced from the political cycle and not linked to it in any way. That is why my Amendment 6 sets the review period at three years. This will achieve the dual objective of allowing timely consideration of the work of the OBR, giving Mr Chote and his colleagues the benefit of that professional input and stimulus, but most important of all, establishing a cycle of review which is divorced from the political cycle. That is a crucial aspect in maintaining independence and cross-party respect for the work of the OBR.
Lord Sassoon
I thought that I heard support from across the Chamber on this point. As I say, the issue is one of a backstop date. The noble Lord, Lord Eatwell, is seeing chimera where none is to be seen in trying to link the political cycle with this five-year backstop date. We think that it is appropriate to have a date in there to ensure that the independent review happens at some stage, but it is most likely that the non-executive directors will indeed choose to have reviews on some other cycle or whenever they think it is appropriate. I absolutely agree with the noble Lord, Lord Burns, that we have to allow—it is proper to allow this—the non-executive committee the freedom to make up its own mind on this. A shorter period may well be decided on, particularly in the initial period of operation, just as, in the context of the Monetary Policy Committee, a review was carried out a couple of years into the new arrangements. Therefore, we should leave this to the committee’s judgment and not impose a rigid pattern on it.
It might be relevant to consider read-across or precedents from other comparable bodies. However, I have been able to tease out only one comparable read-across involving the Dutch Central Planning Bureau, which has a provision for external reviews every five years and has stuck to that model since 1945. That continues to work for that body.
Lord Sassoon
I believe that it has the review every five years, but I think it would be wrong to have a fixed provision of five years. One of the dangers of having a shorter time such as three years is that it might become a regular feature. What we need here is flexibility but with a sensible and appropriate backstop date. It is also important to remember in this context that these external reviews are far from the only means through which the OBR is being and will be scrutinised. I remind noble Lords that the package of scrutiny goes much wider. First, there is the duty on the OBR to act transparently, which means that all its work is open to ongoing challenge and review—this is proving to be the case already—from any of the well regarded and distinguished think tanks and academics looking at its work. The OBR is required to produce an annual assessment of the accuracy of its fiscal and economic forecasts.
There is also the fact that the OBR intends to establish an advisory panel of experts to support and challenge its work on an ongoing basis, which not only is an important additional element of external challenge and review but brings the OBR into line with the best practice, drawn in this case from the United States’ CBO. I see the noble Lord nodding on that point.
On the basis of the argument put forward by the noble Lord, Lord Burns, and backed up by my noble friend Lord Newby, and considering the other elements of scrutiny that are ongoing and challenged externally, I ask the noble Lord to withdraw his amendment.
Lord Eatwell
Lord Eatwell
My Lords, I will not speak to this amendment again except to say that I think that it would be very unfortunate if there were to be a delay of more than about three years to an external assessment of the work of the OBR. While one wants confidence in one’s non-execs, one also wants some framework within which to work, as my noble friend Lord Myners said.
I welcome the news that an advisory group will be established. I think that that is an excellent idea and I am delighted that it is going to happen. It is regrettable that the Government have not accepted this amendment but, in the context, I will not move it.
Lord Eatwell
“( ) The budget for the annual operations of the Office of Budget Responsibility shall be published, and be available for scrutiny by the Treasury Committee of the House of Commons.”
Lord Eatwell
My Lords, I first moved this amendment in Grand Committee in which, of course, there are no votes, and the matter was simply left on the table. I regret that the Government have not seen fit to bring forward some proposals whereby the OBR’s budget would be formally exposed to independent scrutiny. My argument then was the same as my argument now. Given that our fundamental objective is to ensure the OBR’s independence to the greatest degree possible, one of the key means of controlling any independent organisation that is limiting its budget relative to its responsibilities must be constrained. In this amendment we have proposed that it be constrained by the requirement to publish the annual budget and make it available for scrutiny and assessment by the Treasury Committee in another place.
When we discussed this in Grand Committee, the Minister made the following points. First, he argued that the Treasury was incentivised to fund the OBR adequately, since the OBR performed important tasks for the Treasury. What worries me is that this argument is indicative of a failure by the Government to understand fully the need to ensure the independence of the OBR. Of course the Treasury is incentivised to fund what it wants done, but it is not incentivised to fund what it does not want done. Truly independent studies by the OBR that ruffle Treasury feathers will not attract enthusiastic funding from the Treasury. Therefore the incentivised argument really does not carry any weight.
Secondly, the Minister argued that the current funding agreement, outlined in a letter from Sir Nicholas Macpherson to Robert Chote, provided adequate funds to the OBR through to 2014, but what about after 2014? The creation of the OBR is not just for the next three or four years. We on this side of the House hope that it will become and remain for many years a valuable instrument in UK economic policy-making—valuable because it is independent—just as the Monetary Policy Committee has become a valuable instrument in UK economic policy-making. To argue simply that things are okay now is a quite inadequate way of providing confidence for the future. Therefore, the second argument does not stack up.
Thirdly, the Minister argued that there were other means of informing the Treasury Committee of another place of the OBR’s budgetary position, for example via the OBR annual report. Once again, he fails to grasp the substance of independence. It is not for the OBR to fight its budgetary corner, which is what it is being asked to do. It is for Parliament to ensure that its independence is protected. That is what we on this side seek to do in this amendment.
Finally, the Minister suggested—extraordinarily—that paragraph 15 to Schedule 1 provided protection for the OBR’s budget, whereas in fact it does exactly theopposite, leaving power with the Treasury to keep the OBR on as tight a budgetary leash as it wishes. Therefore, the arguments deployed in Grand Committee did not answer the case that was made. They were not simply unconvincing but disturbing, in that they betrayed a lack of understanding of, and commitment to, the concept of the independence of the OBR.
I have been working on this issue and my concerns deepened when I investigated what had happened to similar organisations in comparable jurisdictions. In Canada, the incoming Conservative Government established the Parliamentary Budget Office in 2008. Toronto’s Globe and Mail reported that a year later, after the Parliamentary Budget Office had produced two reports that were critical of the Government, the office’s annual budget was frozen despite earlier promises to boost it by a third. This was Canada's Macpherson moment, when the letter and the promise were withdrawn.
In Sweden, the Fiscal Policy Council was set up in 2007, once again by an incoming Conservative Government—there is a pattern here. On 18 November last year, the council wrote an open letter to the Government pointing to the discrepancy between its remit and its resources. What was the reaction? The Swedish Minister of Finance is reported to have reacted negatively to the letter and suggested—you guessed it—that the council's budget should be cut in response. Thus in Canada and Sweden—two jurisdictions for which we have great respect—critical reports have resulted in budgets being frozen or cut.
On 6 December last year, a letter appeared in the Financial Times in support of the independence of the Hungarian Fiscal Council—the Hungarian version of the OBR. One author of that letter was Mr Robert Chote, the chairman of our OBR. As well as making the case for the independence of the Hungarian organisation, Mr Chote and his fellow signatories argued that:
“Developments in Hungary are also of a more general interest for the viability of independent fiscal monitoring. It is easy for a government to be in favour of this in principle. It is more difficult to stand criticism when it is actually delivered”.
How true that is—and how important, therefore, is the amendment before us, the purpose of which is to support the independence and the financial integrity of the OBR.
If the OBR behaved in a manner that did not suit the Government, for example by undertaking extra studies that cast government policies in an unfortunate light, the easiest way to discipline those independent-minded souls would be to cut their budget, forcing them back to their core function and thereby diminishing their independence. Control of the budget is an important means of controlling any organisation, as the Swedish Minister of Finance made clear.
The amendment seeks to provide the OBR with the protection of independent scrutiny of its budget. The budget must be published and made available for scrutiny by the Treasury Committee of another place. The OBR would not have to fight its corner; Parliament would fight its corner for it. This would give the Treasury Committee the opportunity to have its say on whether any inappropriate limitations were being placed on the OBR’s operations by budgetary means. If you like, the amendment provides scope for the Treasury Committee to act as the financial champion and protector of the independence of the OBR.
The Minister should mark the words of Mr Chote in his letter in the Financial Times, and accept the amendment to ensure that the OBR’s budget is protected, even when it speaks unwelcome truth to those in power. I hope the Minister can give me some reassurance that this issue will be taken seriously and will be considered for government amendment at Third Reading. I beg to move.
Lord Higgins
My Lords, given that I was chairman of the Treasury Committee in another place for something like 14 years, I am naturally rather sympathetic to the amendment. However, it does not seem to do what the noble Lord, Lord Eatwell, said it does. It does not enable the Treasury Committee to control the budget, but enables it to ensure that the budget is scrutinised after being published. This is something which my noble friend should readily accept, because it would be very surprising if the annual operations budget were not to be published. I should have thought that that was consistent with the whole argument for transparency which we have heard from the Government throughout the debates on this Bill, and that it should be virtually automatic. It is equally likely that the Treasury Committee would wish to scrutinise the budget, once published. My noble friend might of course argue that it is unnecessary for the amendment to be made, but, if it were, some reassurance would be given to those expressing the kind of view expressed by the noble Lord, Lord Eatwell. It would certainly be right for the budget to be published and for the appropriate body to look at it to be the Treasury Select Committee in another place.
Lord Sassoon
My Lords, perhaps I may just get my head round the formal non-moving of an amendment that has not been put down. I shall try to give the noble Lord, Lord Eatwell, the reassurance that he seeks in this area. The Government support the spirit of the amendment. Transparency and parliamentary scrutiny of the OBR’s budget are absolutely central to safeguarding its independence. I do not think that there is any difference between us on that point.
The next issue is getting a proportional arrangement which achieves the objective. The effect of the proposed amendment has already been achieved. In line with the Treasury Select Committee's recommendation, the annual budget of the OBR will be identified separately in the Treasury's estimate and it will be available for the Treasury Committee to scrutinise in another place. Nevertheless, we have gone further than the Treasury Committee asked for in order to enhance the transparency of the OBR’s budget and critically to protect it from any suggestion of politically motivated cuts. Again, in line with the Treasury Select Committee’s recommendation, the OBR will also be able to submit to the Treasury Select Committee an additional estimates memorandum alongside that of the Treasury in which it can explain for itself the reasons for changes in the available budget for the year ahead. I think that will go beyond what is proposed, in effect, in this amendment because the OBR will be free to explain in full what any changes in the budget mean.
I agree with the noble Lord, Lord Burns, that if we need to be concerned about anything here it is the multi-year aspects of it, which the proposed amendment does not address. The OBR has already been provided with an agreed and publicly documented multi-year budget, so that an annual budget exercise cannot be used to exert hidden pressure on the OBR. This specific element has been welcomed by the IMF.
I will divert for a moment to address one or two of the points raised by the noble Lord, Lord Eatwell, on some of the international experience in this area. While I am sure that the Toronto Globe and Mail is a fine source of reporting, I think it is relevant to remember that the Canadian Parliamentary Budget Officer is really not in any comparable position to the OBR. Its budget is not separately identified anywhere within the estimates of expenditure presented to the Canadian Parliament. It is a very different office from the one we are looking at. The Parliamentary Budget Officer in Canada was not given an agreed and published multi-year budget. I think we are in very different territory from Canada.
Hungary was mentioned. It is interesting to note that Hungary’s Fiscal Council chairman pointed out—I do not know whether this is correct—in the context of saying it was very, very rare to introduce substantial changes or abolish fiscal councils that the only example he could point to was Venezuela under Hugo Chavez abolishing its fiscal council. So there are one or two examples but they are not comparable examples. It is precisely to guard against any suggestion of such interference that we have put in place the measures that we have.
In trying to give the noble Lord the reassurance he seeks, we have discussed already the responsibility of the OBR’s non-executives. Critical to that is their duty to report on anything that appears to them to constrain the OBR’s discretion. Of course, that would include any attempt to control the OBR through manipulating its budget. To quote the chair of the Treasury Select Committee:
“It is vital that the OBR has the resources it needs. The Committee will monitor this carefully: the terms of reference suggest that the Treasury accepts the importance of transparency and separate disclosure, and we will have the information we need”—
we, the Treasury Select Committee—
“to do our work”.
The package of measures we propose for the OBR in the Bill follows the recommendations of the Select Committee and in the judgment of the Treasury fully reflects that intention. The chair of the OBR has already made clear that he has adequate resources and that he will promptly raise any issues on funding with the Select Committee—a very public forum in which to raise any concerns.
Finally, I will quote Robert Chote at his pre-appointment hearing in front of the Select Committee. He said:
“If you accede to my appointment and I find myself being squeezed in that way, this committee will be hearing about it very promptly. That’s how we make that public and ensure that those sorts of pressures do not go unremarked”.
I suggest that there are a considerable number of safeguards in place. Indeed, we go further than the noble Lord’s amendment because we believe that the multi-year dimension is as important as, if not more important than, the single year dimension to which his amendment refers. In view of the reassurance that I have been able to give him, in particular pointing to the role that we have just now confirmed for the non-executives, I hope that he will withdraw the amendment.
Lord Eatwell
My Lords, I am grateful to all noble Lords who have taken part in this short debate, not least because there seems to be a unanimity of purpose around the House. Perhaps I may address a couple of the points that were made. The first is the point made by the noble Lord, Lord Burns, supported by the noble Lord, Lord Sassoon, about the word “annual” in my amendment. I think they are absolutely right. It should refer to the budget; the word annual should be taken out, then everything would flow quite nicely. However, the noble Lord, Lord Sassoon, still does not quite grasp the idea that the OBR should not have to fight its own corner but should be given parliamentary protection in the budgetary field for the long term, not simply for the period for which Sir Nicholas Macpherson’s letter is relevant. We are looking beyond that provision.
The one element from which I derived some comfort in the reply of the noble Lord, Lord Sassoon, was the issue of a separate line in the Estimates, which will provide the Treasury Select Committee with the opportunity separately to identify the budget of the OBR. My amendment would require that to be brought for scrutiny, rather than it simply being available, but I am willing to accept that that is a small point.
I suppose that I should accept being chided by my noble friend Lord Barnett for leaving the House of Lords Economic Affairs Committee out of the amendment. I felt that since this was particularly an expenditure matter, it should be handled by the committee in another place. I am willing to stand corrected on that point.
However, I feel that there is general unanimity around the House that this issue is important in sustaining the independence of the OBR. I am grateful for the assurances that the Minister has given. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I should perhaps speak briefly to Amendment 9 at this stage. I will respond later if other noble Lords speak to Amendments 8 and 10.
On Amendment 9, the risks and assumptions of the OBR in producing its reports are critically necessary for a full understanding of its analysis. Provision to require the OBR to set those out was originally included in the draft charter. However, we recognise that a key purpose of the Bill is to provide appropriate assurances that the good practice already adopted by the OBR will continue. For that reason, Amendment 9 will elevate the provision from the draft charter to the face of the Bill and broaden the requirement to apply to all reports produced under the OBR’s main duty.
Lord Eatwell
On Amendments 8 and 10, the noble Lord, Lord Higgins, will have to suffer the possibility of inconsistent forecasts because that is, in a way, embodied in the independence and separation of the Bank of England. The whole point of an independent Bank of England, and the way the Labour Government set up the independent status of the Monetary Policy Committee and the Bank of England, is that it should be allowed to take an independent view. That independent view will be informed by its own research. This can lead not just to forecasting inconsistency but to policy inconsistency, but that is the price we are going to pay if we think this is an appropriate policy mix. The very distinguished late economist Sir James Meade pointed out many times that this separation could lead to serious policy inconsistency, and he was entirely opposed to its, none the less, that is the way we have constructed policy-making in this country, and that separation will bring with it the possibility—indeed, the probability—of some forecast inconsistency. However, we should note that recently the Governor of the Bank of England has been making many statements about fiscal policy, which is not his territory. That is very unfortunate. He seems to have encouraged the Prime Minister to make comments on interest rates, which are not his territory either. If this separation is deemed to be a good thing by our Parliament and policy-makers, I hope that the governor and the Prime Minister will respect it.
The problem I have with Amendment 10, tabled by the noble Lord, Lord Higgins, is that I do not think the output gap is a precise notion which can be believed if you say it is 2.5 per cent or something like that. In the Budget debate and in the debate on the comprehensive spending review, I argued that it is a statistical construct. It has embedded within it a series of statistical assumptions. It was quite striking that in the first OBR report, the definition of the structural deficit was changed, to the benefit, I might add, of the Government’s arguments. Therefore, I do not want too much credibility to be put on what is a useful indicative statistic. The weight put on it can be taken too far.
I strongly support the Government’s amendments both on transparency of assumptions and consideration of the risks to which the economy might be exposed. The latter issue, with the OBR now being required to talk about the risks to which the economy is exposed, is very important. For example, let us suppose that we had had an OBR of 2006 vintage. That OBR could have expressed concerns about the fiscal risk the economy was subject to by being dependent on such a high proportion of tax revenues coming from just one sector of the economy, that of financial services. It would have had the opportunity to say, in facing that risk, that some diversification of revenue sources might be desirable. Similarly, in defining the sustainability of the public accounts, the OBR should take into account the risk to sustainability generated by the foreign balance and by the savings and spending behaviour of the private sector, and their interactions with the public balances. Providing these insights into the risks of public sector financial management would extend the debate about the public finances in a very useful way and would ensure that the debate is far better informed than it has been in the past. So I would like particularly to add the support of this side for government Amendment 9.
Lord Newby
I would like to echo the noble Lord, Lord Eatwell, in two respects; first, in his comments on Amendment 9, which I will not repeat, and secondly, in his comments on Amendment 10. I am dubious about the value of giving enhanced status to an assessment of the output gap or when the economic cycle is likely to end for reasons largely already given by the noble Lord, Lord Eatwell. The output gap is not an absolutely firm context and figure that is easily grasped and measured. As we saw with the previous Government, a lot of weight was put on the economic cycle because the golden rule about government expenditure and borrowing depended on it. The problem was that whenever a difficulty arose, lo and behold, the definition of the cycle changed to push the difficulty back. It proved to be a far more elastic concept than we thought, and the old Ricardian economic cycle that depended on grain crops just does not obtain in quite the same way today. So while I am sure that the Office for Budget Responsibility may well wish to opine on these matters, and it will be quite interesting to know what it thinks, it is of secondary importance in setting government policy. Indeed, because of its somewhat nebulous nature, I would not want us to put too much weight on it again.
Charities: VAT
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Lord Sassoon
My Lords, the increase in taxation from charities, as from other parts of hard-pressed society, including working families and businesses, is regrettably necessary to reduce the enormous deficit that the country has to bear. That is the regrettable state of affairs. It is not easy to consider where the burden should fall. Charities are, in this respect, sharing part of the burden. As I said, there are other tax proposals that the previous Government had that would have hit the charity sector, in this respect, harder. Charities get tax relief of the order of £3 billion through VAT, gift aid and other provisions.
Lord Eatwell
My Lords, I declare an interest as the master of a Cambridge college that is registered with the Charity Commission. I am sure that all noble Lords will know that changes in fiscal policy, with respect to both irrecoverable VAT and the fall in the standard rate of taxation, which has reduced the return on gift aid, have made considerable inroads into the support that government has in the past provided for charities through the fiscal system. We on this side quite understand that these are unintended consequences of fiscal policy, but we do not accept the negativism and complacency that the noble Lord has displayed. There is an easy answer to this question. He usually asks for policies because the Government cannot think them up themselves, so I will give him one: why are charities not allowed to make a return to the Treasury of the VAT paid, so that the Treasury can then apply a clear discount for charities, thus making its revenue from charities transparent, not disguised as it is at present?
Lord Sassoon
My Lords, we look at charitable-related VAT schemes and have a number under consideration at the moment. I am always happy to look at schemes. I stress that the Government have made special recognition of the importance of the charitable sector through the tough spending review. The Office for Civil Society will be spending around £470 million on programmes supporting the voluntary and community sector over the spending review period. The big society bank will have a further contribution to make and my right honourable friend the Chancellor announced a £100 million transition fund for those voluntary and community sector organisations that are affected by spending reductions. The Government absolutely recognise the support that is needed for this sector.
Finance and Insurance Market: Underwriting Fees
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Lord Sassoon
My Lords, I am obviously interested to hear from the noble Baroness who has great experience in these matters. However, as she well knows, a range of outcomes could emerge from the OFT market study. Those could include enforcement action taken by the OFT through a market investigation reference to the Competition Commission, recommendations to government to change law or regulation, voluntary action by industry players or, indeed, a clean bill of health. We should wait to see what the OFT recommends.
Lord Eatwell
My Lords, is not the truth of the matter that the complete failure of the Government to persuade the banks to lend has forced companies into increasing rights issues and that the banks have used corporate desperation as a lever to charge higher underwriting fees even when market conditions have improved? Does the Minister agree that this is prima facie evidence of an underwriting cartel? Does he regard this as a legitimate way for banks to repair their balance sheets?
Lord Sassoon
My Lords, first of all, I do not accept for one moment the premise about government action in some way preventing companies borrowing from the banks, because, as we discussed at some length yesterday, the Government are taking a considerable amount of action to make sure that the banks lend and increase the amount of lending over what they would otherwise have done. As to the noble Lord’s questions about the underwriting market, again I would wait until the OFT has come up with its report within the next few weeks.
Banking: Bonuses
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Lord Eatwell
My Lords, I am most grateful to the noble Lord for repeating as a Statement the Chancellor’s reply to an Urgent Question asked by my right honourable friend Alan Johnson in another place, although it is notable that the Chancellor’s Answer had very little to do with the Question asked, which was about the Government’s view on the level of bonuses to be paid in the current round.
Is the noble Lord aware that the Government’s cut in taxation of the banks and the Chancellor’s rather obvious evasion of the substance of the Urgent Question will be received in the country with a mixture of despair and indignation, but not with any surprise? There will be despair because it was the reckless behaviour of the banks and others in the financial sector that imposed economic hardship, even misery, on millions of British people, particularly the most vulnerable. Does he agree with the Financial Services Authority that the bonus policies of the banks encouraged that reckless behaviour? Would he agree that the payment of large bonuses at this time is morally indefensible? Of course, there are lots of things in economic life that are morally indefensible, but the payment of large bonuses now is not just immoral but also against the national economic interest. That is why despair will be laced with indignation.
I believe that no one in Britain objects to the view that those who work hard and take risks with their own money deserve substantial rewards, but would the noble Lord agree that the profitability of the banks over the past year is due less to hard work and more to the financial support provided by the Government and to the low interest rate policies and other policies of the Bank of England? Is it not the case that the banks were reckless with our money, then we bailed them out and then they hoovered up the funds to pay themselves bonuses? Would the Minister agree with me that socially responsible banks will be using their profits to rebuild their balance sheets, strengthening their underlying finances, rather than frittering away our money in excessive bonuses?
Turning to the question of the taxation of bonuses, will the Minister tell the House whether the Government are considering following the practice in the United States, where remuneration in excess of $1 million is not allowable as an expense against corporation tax? The Chancellor asked for ideas and there is one. Members of the House will be aware that in the United States there is not a single non-dom, so will the Minister tell the House his estimate of the proportion of bonuses paid here to residents claiming non-dom status? What proportion of bonuses to non-doms is paid via non-UK jurisdictions? More generally, is the Minister able to tell the House what proportion of gross value added is paid in tax by the financial sector as compared to other major sectors of the economy?
Of course, once issues of taxation are raised, the bankers seek to hold the British people to ransom by claiming that they will simply leave these shores rather than pay their fair share. Will the Minister tell the House what proposals Her Majesty’s Government have made to the G7, the G20 or the European Union for a concerted international policy on financial sector remuneration?
The truly distressing factor about this Statement is that there is really nothing surprising in the Chancellor’s reply, other than his flagrant disregard of the heartfelt and legitimate concerns of the British people.
EU: Financial Assistance
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Lord Sassoon
I am grateful to my noble friend, because his question enables me to say that Article 122.2, under which the financial stability mechanism was set up, was originally intended to provide support for member states following natural disasters. It was European Finance Ministers, before my right honourable friend the Chancellor took office, who decided in May to apply that article to deal with the eurozone crisis at that time. It is absolutely the position that my right honourable friend who is now the Chancellor opposed the use of the article at that time and in that way. It is the Government’s position that this is a temporary solution and should absolutely not be the permanent way of doing things.
Lord Eatwell
My Lords, will the noble Lord confirm that the Government will themselves have to borrow the money to provide the loan to Ireland? Will he also acknowledge that the National Audit Office has now determined that any interest paid on such borrowing should be included in current expenditure? Will he therefore tell us how much this interest payment will increase the deficit, and whether any other expenditure cuts are to be made to pay for it?
Lord Sassoon
My Lords, first, there will be no hypothecated borrowing by the Government to back up—as far as I am aware—the loan to Ireland. Of course, the loan to Ireland—as and when it is drawn down—is subject to approval in legislation if and when it comes to your Lordships’ House. We might return to it over the next few days. The loan has to be approved by Parliament. It is then drawn down. Of course funds have to come from somewhere, but there is no intention to back that up with a specific loan.
It will not be for the Government to determine the accounting, but the intention is that the bilateral loan will carry an interest rate that is 2.29 per cent higher than the sterling seven and a half year swap rate that applies at the time. On this week’s figures, that would be an interest rate of 5.9 per cent, which would be considerably in excess of the UK Government’s borrowing rate. My understanding—as I say, it is not the Treasury’s decision—is that the net interest margin, which would of course be a gain because the receipts from Ireland would exceed the costs to the Exchequer, would indeed be a positive contribution on the fiscal balance.