Currency Markets

Lord Eatwell Excerpts

Wednesday 2nd February 2011 Lords Chamber

[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

Tuesday 1st February 2011 Lords Chamber

[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

Monday 31st January 2011 Lords Chamber

[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

Monday 31st January 2011 Lords Chamber

Amendment 11 will clarify the drafting of Clause 5(3) to make explicit that the OBR must have regard to government policies relevant to its analysis, including the Government’s economic policies. The amendment preserves the original effect of Clause 5(3), which is to prevent the OBR from examining non-government policies. Otherwise, the OBR could be drawn into political commentary, which might undermine its perceived impartiality and independence. The OBR will continue to be able to analyse non-policy scenarios such as economic or demographic scenarios. I beg to move.

[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.

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[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.

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[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 Eatwell]

Does that body hold the review every five years or over a lesser period?

[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.

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Tabled by

[Lord Eatwell]

6: Schedule 1, line 4, leave out “5-year” and insert “3-year”

[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.

Amendment 6 not moved.

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Moved by

[Lord Eatwell]

7: Schedule 1, page 15, line 18, at end insert—
“( ) 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.

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[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.

Amendment 7 withdrawn.

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[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

Lord Eatwell Excerpts

Thursday 13th January 2011 Lords Chamber

[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

Lord Eatwell Excerpts

Wednesday 12th January 2011 Lords Chamber

[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

Lord Eatwell Excerpts

Tuesday 11th January 2011 Lords Chamber

[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

Lord Eatwell Excerpts

Wednesday 15th December 2010 Lords Chamber

[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.

Budget Responsibility and National Audit Bill [HL]

Lord Eatwell Excerpts

Thursday 9th December 2010 Grand Committee

Moved by

[Lord Eatwell]

40: After Clause 8, insert the following new Clause—
“Peer Review Committee0
(1) There will be a Committee of 5 suitably qualified persons, not being or having been members of the Office, to be known as the Peer Review Committee (the “Committee”).
(2) It will be the responsibility of the Committee to prepare an annual report on the accuracy of fiscal and economic forecasts prepared by the Office, including the appropriateness of the methods employed.
(3) The Committee must—
(a) publish the report,(b) lay it before Parliament, and(c) send a copy of it to the Treasury.”

[Lord Eatwell]

My Lords, I hope we can have a fairly brief Committee today, not least because the annual contest between the universities of Oxford and Cambridge at Twickenham has just kicked off. This, however, is not a contest but an attempt to improve the Bill. In moving Amendment 40 and speaking to Amendment 43, I believe we can significantly improve it.

We have already discussed whether the OBR should write its own school report, as the noble Baroness, Lady Noakes, referred to it. There was general agreement around the House that that was a bad idea. In proposing this amendment I have, as I am sure Ministers and officials have, examined procedures in equivalent organisations in other jurisdictions. The most relevant of these is the US Congressional Budget Office, although there are significant differences between the two organisations. The CBO is answerable to Congress, whereas the OBR is a creature of the Executive. This has been the source of many of our difficulties in constructing a framework of independence. None the less, we have something valuable to learn from the CBO, which uses clear and extensive peer review. As I am sure the Minister is aware, the CBO is scrutinised by a large and very distinguished peer review committee of, I think, about 20 people. Nothing so large is necessary for the rather more limited activities of the OBR. None the less, independent peer review will undoubtedly be valuable. It will not only add to the intellectual input to the activities of the OBR—undoubtedly a positive factor—but act as a further buttress to independence. The peer review committee of the Congressional Budget Office publishes its findings on the CBO website, enhancing the transparency of the entire process.

We have already discussed the need for the past forecasts of the OBR to be assessed by some independent authority. That independent authority could be the peer review committee proposed in Amendment 40 to the Bill and Amendment 43 to the schedule, although there could be other ways of doing it. Amendment 40 provides the peer review committee with clear and unambiguous terms of reference. It must report on,

“the accuracy of fiscal and economic forecasts prepared by the Office, including the appropriateness of the methods employed”.

This is a clear technical remit; the committee would not be allowed to stray into the realms of policy.

Amendment 43 provides some detail on the appointment of the peer review committee. Again, I have looked at the practice of the Congressional Budget Office, where many of the members of the peer review committee are nominated by the council of the American Economic Association. I have suggested that the ideal body to recommend to the Chancellor persons of appropriate technical expertise would be the equivalent professional body here in the UK—the council of the Royal Economic Society. Otherwise, appointment will be by the Chancellor, with the approval of the Treasury Select Committee of another place.

It might be argued that the process of peer review will take place anyway in the context of vigorous debate among economists and econometricians over forecasting and policy. However, I submit that without a dedicated peer review committee this debate, which will take place anyway, will tend to be unfocused. The particular value of the peer review committee is to have a group of very well qualified professionals who see it as their responsibility to examine the results and the methods of the OBR. As I suggested, there may be other ways of achieving this objective, but I believe that an independent review of the OBR’s record and methodology will add tremendous value to the process and help to buttress the independence of the OBR, which is something that we all seek. I beg to move.

[Lord Burns]

My Lords, I have a lot of sympathy with the idea of having independent reviews of forecasts and the methods employed at some intervals during the process. My concern is whether the amendment makes too much of a meal of the issue. It is important to have an appropriate way of appointing an independent person or persons to undertake this work. My preference would be to give this job to the non-executive directors of the OBR. That seems a perfectly respectable way to do this. It is common practice in companies that the independent directors should appoint auditors and should look after other forms of oversight.

I cannot believe that a group of five people is needed to undertake this task, which, as the amendment says, is to evaluate forecasts and to look at the methods used. If we are not careful, we will have the same problem as we have had with the MPC—quite soon, one runs out of qualified people to fill a committee.

I also have concerns about whether an independent review is needed every year. Not a lot will change each year. We will have one year’s figures in the forecasts and we will be able to look at the outturns. When one is looking at issues relating to bias and variables, one typically needs a run of years to be able to see the pattern of the forecasting record. The Bill suggests that there should be an annual review, but to me the issue is how often one needs independent input into this process. I would be cautious about that. It is a task that one could leave to the non-executive directors, who would decide whether, for example, an independent review was needed every year or whether internal and independent reviews should be held in alternate years. I would leave it to the independent directors, or members of the office, to determine the number of people needed for these investigations, who to recruit and whether to recruit the same people on successive occasions.

I support the idea of independent input, but let us not make a meal of it. The task is on a different scale from that in the US example that the noble Lord, Lord Eatwell, cited. We need something of a size that is appropriate to the task in hand.

[Lord De Mauley]

My Lords, I am grateful to the noble Lord, Lord Eatwell, and his noble friends for their amendment and to the noble Lord, Lord Burns, for his contribution. The Government recognise the importance of external expert challenge, which is the issue that the noble Lords have raised. Indeed, the fact that the OBR analysis is publicly available means that it is open to scrutiny.

On a previous occasion, we debated whether the OBR should produce an assessment of forecast accuracy. This process needs expertise in forecasting, which the OBR clearly has. The Government argue that this expertise will be difficult, although not impossible, to find elsewhere. It also requires a full understanding of the data underpinning the forecasts. Again, the OBR has this, and a similar level of knowledge is scarce elsewhere, although, I acknowledge, not unobtainable.

Assessing previous performance provides a very valuable opportunity for the OBR to learn and understand what has driven diversions from accuracy. It is clear that it is the OBR’s intention to use the report in this way and that it has the right skill set to do so. The noble Lord, Lord Eatwell, mentioned the Congressional Budget Office. I understand that, although it does indeed have a panel of external advisers who meet twice a year, the CBO carries out its own analysis of previous forecasts. I think that our proposed design is in line with discussions with international organisations.

The proposals in the amendment raise a number of issues that we need to consider. The Government, for example, believe it is difficult to envisage that the committee could get into the detail needed to produce a comprehensive and meaningful assessment. Like the noble Lord, Lord Burns, we share the concerns about a body of five people being needed to scrutinise this work. We are not sure whether the noble Lord envisages that they would be paid and, if so, how much. We also feel that there is an issue of focus and that it might be appropriate to look at a larger section of the OBR’s work, because perhaps all parts of its work could benefit from external expertise.

In general, in a broader context there is nothing to stop any person or organisation assessing the OBR’s forecast accuracy by looking at its forecasts and comparing them with the actual outturn data. Where value can be added is in making sure that the OBR uses all the best information. That is why we put an emphasis on transparency across the piece. None the less, we accept that bringing in external expertise could be very useful. We believe that it is consistent with the Bill as drafted but that it is important to take a more proportionate approach. Of course, the OBR already has the power to convene advisory panels to provide external perspectives if it sees fit, and Robert Chote indicated his interest in that in his evidence to the Treasury Select Committee. The OBR is already drawing on external expertise, as noted in its autumn forecast statement.

In conclusion, the Government will reflect on whether additional steps are needed in the light of this very helpful debate and suggestion. In particular, I am interested in the suggestion of the noble Lord, Lord Burns, which I should like to take away and think about.

[Lord Eatwell]

I am grateful to the noble Lord. Perhaps I may take up a couple of the points to which he referred, as did the noble Lord, Lord Burns. First, there is the question of whether there would be enough people to do the job. The Treasury sends out a compendium of about 40 independent forecasts, so at least 40 independent forecasting organisations are doing this job. It seems to me that within those organisations, as well as within universities and research organisations such as the national institute, there is a sufficient pool of talent to draw on over the years to ensure that this job is well done.

Secondly, in suggesting that there should be a team of five, I was not recommending that they all commit themselves to do the job in any one year; rather, I was proposing that they act as a committee, perhaps assigning a couple of its members to do the job each year. The group of five would provide continuity over the piece.

There was then the question of how much the committee members should be paid. I should tell the noble Lord that academics, in particular, are so obsessive and competitive that they will do this in exchange for a good lunch. Given the amount that they are paid, they are not so well fed these days, and I do not think that there would be any difficulty in finding suitable people at a reasonable level of remuneration.

The key issue is bringing in external experts who are committed to doing the job. As I conceded in my opening speech, the transparency with which the OBR is to operate will attract outside commentators. What is needed is a group of people who have suitable expertise, in whom the Chancellor and the Select Committee of another place have confidence, and whose responsibility it would be to comment on the two major forecasts per year that the OBR is required under the Bill to make. However, I am heartened by the Minister’s response and look forward to further discussions on this matter. In the mean time, I beg leave to withdraw the amendment.

Amendment 40 withdrawn.

--- Later in debate ---

[Lord Touhig]

My Lords, perhaps I may at the outset apologise if I am partly responsible for your Lordships having to meet again today. I very much regret that I had not anticipated the speed with which your Lordships would complete their deliberations on earlier amendments. Although I was around on Monday, I was in the Chamber. I apologise again if my failure to be here has meant that the Committee has had to meet again today.

I apologise also for the fact that this amendment is a manuscript amendment. My original Amendment 41 was deficient in that it used the term “Advisory Committee on Public Appointments”, when it should have said “Advisory Committee on Business Appointments”. I took the information from the 15th report of the Public Accounts Commission. I am afraid that I should have been more careful and checked out that information.

Until earlier this year, I served on the Public Accounts Committee in the other place. As a result of that experience, I have been able to witness at close hand the tremendous work that the National Audit Office does and to see how important the work of the Comptroller and Auditor-General is in keeping a check on how government spends the taxpayer’s money. Crucial to the role of the C&AG is the independence of the person who occupies that office. It is vital that the office is both independent and seen to be independent. For this reason, none of his decisions should be seen as being born of self-interest.

Under the Bill, future appointees to the office of the Comptroller and Auditor-General will serve a one-term period of a maximum of 10 years. There will be the real prospect of former C&AGs, on leaving their appointment, seeking other employment. Indeed, in a letter to me following Second Reading, the Minister made that very point—I have copies if any noble Lord wishes to have sight of it. In the letter, the Minister points out that the Government hope that future C&AGs will want to continue their careers after they complete their 10-year term of office. If this is to be the case, it is important that sufficient safeguards are in place to ensure that that does not compromise the position of the Comptroller and Auditor-General in office.

The Public Accounts Commission’s 15th report of March 2008, to which I have referred, contained a number of proposals that sought to create safeguards. The Bill, however, reduces some of them. The commission proposed that the former Comptroller and Auditor-General should abide by decisions of the Advisory Committee on Business Appointments if he or she were to take up any further employment having left the job. My Amendment 41A would require this.

The Bill states merely that former C&AGs should consult with such people as may be specified by the Public Accounts Commission. I understand from the Minister’s letter that the wording in the Bill would allow for more flexibility on which individuals or organisations were asked to give advice. While I understand from the Minister’s letter that the wording in the Bill would allow for more flexibility on which individuals or organisations are asked to give advice, it could result in inconsistency over time, as to both who gives the advice and what advice is given. It is fairer on former Comptroller and Auditor-Generals if, at the outset of their term of office, they know who will give them advice on any appointment that they may take up on leaving office as well as the basis on which these decisions will be made. As such, I suggest that stipulating who will advise former C&AGs is preferable. Furthermore, the commission’s original proposals stated that former C&AGs would have to abide by the advice that they were given regarding their future employment. The Bill does not allow for that.

The Minister in his letter to me following the Second Reading debate stated that, if a former C&AG were to take up a position against advice received by the commission, the commission would be free to make that advice public. He drew the parallel with how advice is given to former Ministers and argued that that would be a strong deterrent against any former C&AGs going against that advice. However, former C&AGs do not have the same high profile as former Ministers; a former C&AG who ignored the advice of the commission would perhaps not attract as much attention or interest as a former Minister who did such a thing. Hence my Amendment 41A.

Amendment 42 would change the time limit on when former C&AGs may accept Crown employment. If former C&AGs were immediately able to accept a position that is in the gift of the Government, there would be a danger that some people could perceive such an appointment as being a reward for actions taken while in office. That would undermine the integrity of the C&AG and lead to his actions while in office being called into question through speculation about his future.

The Public Accounts Commission suggested in its 15th report that former C&AGs should be prohibited from ever accepting any post that the National Audit Office has audited or which was in the gift of the Government. That is a heavy penalty. The Government agree: the Bill prevents former C&AGs from providing services to the Crown or to a body that is required to open its accounts to audit by the National Audit Office for a period of just two years. However, while it is entirely understandable that we would not wish to put a restrictive life ban on former C&AGs, I suggest that two years may be too short a period. If we accept that the greatest risk is of attempts by the Executive to influence the C&AG, the sensible course would surely be for a time limit to be at least five years. In that time, there is the real prospect that the Government will have changed and that a former C&AG’s appointment would be considered as a Crown appointment by others. Such a time limit would mean that a C&AG would not be able to rely with any certainty on the incumbent Government still being in office at the time when he or she might accept some Crown appointment, which would overcome any suggestion of political influence on any decisions that a C&AG would take while in office. Amendment 42 would be the best guarantee that, between a C&AG leaving office and subsequently being appointed to a Crown position, there was likely to have been a general election.

The Bill is in the main a good Bill. It proposes to do some sensible things, but our task is to scrutinise, question and improve it. I suggest that the two amendments that I have tabled for your Lordships’ consideration will make some improvement to the Bill.

[Lord Eatwell]

I support Amendment 41A proposed by my noble friend Lord Touhig, albeit on a slightly different basis. Given that this appointment will now be for only one term of tenure, it is important that we attract people of the highest quality to the post. If they felt that their future career prospects were endangered, it is likely that we would not have the very best field from which to choose. Therefore, when someone comes to the end of their tenure, it is appropriate for them to receive advice from an established committee whose procedures and standards are well known and in the public domain, and whose approbation or approval of a particular post is seen as having undergone a strict assessment as to the impact on the integrity of the post and the individual. If we are to get the best applicants for this sort of job, we must give some certainty about the nature of their future careers. The involvement of an established body with agreed procedures and standards would help to provide that.

Interestingly enough, if my noble friend’s Amendment 41A were accepted, his Amendment 42 would be less important. The committee would have given its approval of the post and that would receive general acceptance. Therefore, the longer time period might not be so necessary. However, I defer to my noble friend, who has much more experience in these matters than I do. The Government should look carefully at Amendment 41A, which would improve both the Bill and the performance in this particular post.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I apologise to the Committee for my failure to be here on time. I should like to place on record my gratitude to the police officer outside—I should probably not name him, but I will write to the commissioner—who let me vault the double line of barriers, even though that caused lots of other people in the square, whose intentions in getting to this building were probably not as well meaning as mine, to try to follow me. I place on record my gratitude to the Metropolitan Police officer who exercised some judgment in letting me through. I am sorry that I did not get here at the beginning.

I am grateful to the noble Lord, Lord Touhig, for raising this question again because it is important that we get right the balance. We must protect the matters of propriety around this office and balance that with what the noble Lord, Lord Eatwell, said about attracting the best candidates to the office.

The fact that this amendment is named Amendment 41A rather than Amendment 41 points out the difficulty with naming a particular body, which could come and go over the years. I believe that it is appropriate to leave it to the specification of the Public Accounts Commission, which can decide on the appropriate body to make the decision at the time. I see the point that the noble Lord, Lord Touhig, is making about the desirability of certainty. Of course, it would be open to the Public Accounts Commission to specify at the time of the appointment—obviously not of the current Comptroller and Auditor-General but of future C&AGs—which relevant body would apply. Specifying a body now that could change over the years would provide a degree of unnecessary inflexibility and the law would have to be changed if the body specified ceased to exist. Critically, we have the protection that the appointment is in the hands of the Public Accounts Commission. The certainty point is something that could be taken into account at the time of the appointment.

[Lord Eatwell]

The amendment reads,

“such person as may be so specified”.

From that, it is not clear to me that the person is to be determined by the Public Accounts Committee, which does not seem to follow the way that the Bill is drafted. I take the noble Lord’s point about succession, although usually when bodies succeed each other their responsibilities are passed on in a reasonably coherent way. This wording does not quite seem to achieve what the noble Lord believes it to achieve, but I shall leave him to consider that. I am not trying to make a difficult point; it is just that the drafting does not seem to be quite right.

[Lord Sassoon]

That is the intention behind the drafting but I shall see whether, on reflection, it achieves that. I think that we can accommodate the degree of certainty, albeit that, even in the period of appointment of a C&AG, the relevant advisory committee could change.

I turn to the question of abiding by the committee’s decisions. I hear what the noble Lord, Lord Touhig, says about this being different from ministerial appointments or other Senior Civil Service appointments, where similar conditions apply. However, as we have seen in recent years, there is, as there should be, a considerable focus on current and former Comptroller and Auditors-General. It is inconceivable that similar pressures to those that apply to Ministers and officials would not apply very directly in this case. Therefore, just as, so far as I am aware, it is not written into other Bills, I do not believe that there is a need to write into this Bill the necessity to abide by decisions. If it were thought appropriate to draw attention to this point, I believe it would be more applicable to the terms of appointment rather than the Bill.

On Amendment 42, I certainly agree with the noble Lord, Lord Eatwell, that we must make sure that we get the best field of candidates. If the matters that are the subject of Amendment 41A are addressed properly, which I believe in the total construct they are, then I believe that a period of two rather than five years strikes the right balance when considering the terms of the appointment. Again, it is difficult to say what the appropriate read-across should be, but two years is the period during which former Ministers go through clearance procedures, and this is a tighter requirement, as it should be.

In addition, there are potential difficulties concerning the legal enforcement of such a restriction. The issue here is whether, by specifying five years or some other relatively high number, we would risk infringing age discrimination legislation by making the appointment process exclude those who were getting closer to—I do not know what the term should be—perhaps our best years. Therefore, there are real concerns and there is clearly no easy answer to the question of what the right number might be, but the legal advice that the Government have received is that, as one pushed that number up—and five years would certainly lead to the legal advice being uncertain—there would be a significant risk that the restriction would be thought to be an infringement of age discrimination legislation. Therefore, subject to making it absolutely clear that Clause 15 works as intended—I think that it does, but I will look again—I believe that we have struck a proportionate balance which ensures that we get the best candidates for the job but does not in any way leave open a suggestion of impropriety afterwards.

Budget Responsibility and National Audit Bill [HL]

Lord Eatwell Excerpts

Monday 6th December 2010 Grand Committee

Moved by

[Lord Eatwell]

20: Clause 4, page 2, line 20, at end insert—
“( ) In fulfilling its duty imposed by subsection (1), the Office must assess and report on the risks to the public finances.”

[Lord Eatwell]

My Lords, before moving on to Amendment 20, I shall make a couple of general remarks about how we have done so far. All sides want, I think, to make the Bill a success. That is not really a matter of political dispute. The Committee has already unearthed some serious failings in drafting. For example, on fiscal policy, the OBR is supposed not to regard a critique of economic policy as within its remit, but on the issue of judging the sustainability of fiscal policy the context of general economic policy is within its remit. What is it to do? Is it one way or the other?

Then there is the question of Clause 5(3)—the clause with the inverse meaning, as I think of it now. Everybody thought that it was designed to prevent something from being done, but then we discovered to our amazement that it is all about what has to be taken into account. This sort of obscurantist drafting gives the law a bad name. There were also the statements in the charter, notably the reference to “intergenerational fairness”, over which we have the grave suspicion that the person who drafted the phrase had not the faintest idea what it meant.

Yet none of these is a political issue. None of them really merits the instruction, “Resist”. All of them are items to debate and to correct. This is a fine example of why technical Bills such as this should go to pre-legislative scrutiny. Be that as it may, my message to the Minister and to the anxious officials behind him is: “Loosen up”. Let us use this Grand Committee for the constructive purpose that it was intended to have and try to do what we all want, which is to ensure that this Bill works, works well and works for the long term.

With respect to Amendment 20, the OBR has made a major step forward in recognising the uncertainty around the probabilistic nature of economic forecasting —and quite right, too. However, this has clearly not yet penetrated the thinking of government Ministers. In the Chancellor’s Statement last Monday, he boldly declared that the OBR had ruled out the possibility of a double-dip recession, when in fact it had done nothing of the kind. The OBR suggested that there was a 50:50 chance that the growth rate would be 2.1 per cent next year but that, at the same time, there was a significant chance of between 10 per cent and 20 per cent that growth would be zero—that is, that there would be a double dip.

However, while the assessment and presentation of the uncertainty of forecasts have been greatly improved, no progress has yet been made on the other risks embodied in the Government’s overall fiscal position. For example, it is now clear that for the last decade—and I recognise that this was under the previous Government—tax revenues have been overly dependent on taxation of financial services. The severe problems in financial services contributed disproportionately to the fall in government revenues and to the growth of the deficit. This, which is a sort of all-eggs-in-one-basket problem, is a standard feature of corporate risk analysis and could, with value, be introduced into the analysis of public policy as well. Similarly, everyone is now aware that the UK economy has become seriously unbalanced, which is just the sort of issue that would be highlighted by regular and careful risk analysis. If the OBR were to extend its analysis of uncertainty to include a risk-sensitive analysis of the public finances, it would provide a complementary and extremely valuable service to policy-makers and align public policy-making with the best practice in private policy-making and private risk assessment.

Chapter 4.10.1 of the charter relates risks only to,

“risks surrounding the economic outlook”,

but associates the economic outlook only with the forecast, not with the state of the economy as it is. This amendment focuses attention on a wider concept of risk—the risk inherent in the underlying parameters of the fiscal and economic stance—and, by doing so, extends risk analysis into the areas of best practice that are now found in the private sector. I beg to move.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I am happy to start by saying that I agree that we should, as far as possible, stick to the technical. I am grateful to the noble Lord, Lord Eatwell, for confirming that he would like to make this a technical analysis of the Bill.

I agree that it is critical for the OBR to assess the risk to the public finances and that that should be clearly set out. The amendment proposes that this provision should be in the Bill, whereas we propose that it should be in the charter, first focusing on the economic risks and secondly focusing on the fiscal risks. As the noble Lord said, there are references to risks in chapters 4.10.1 and 4.10.2 of the draft charter: the first relates to the economic forecast and the second relates to the forecasting of the public finances. I believe that together those two references to risk give the OBR a clear and wide-ranging remit. I will think about the specific drafting in the light of the points that the noble Lord has made, but I believe that the charter is the right place for this. Clearly, the drafting on the sorts of risks that the OBR looks at should not in any way constrain it from looking at the relevant risks, so I will have a look to make sure that, on reflection, we have got all the risks covered.

The OBR has, of course, a duty to act consistently with the charter, so it should not be necessary to include this provision in the Bill. However, we must get it right in the charter, which is where I think we should leave it. I ask the noble Lord to withdraw the amendment.

[Lord Eatwell]

Gosh, that was quite a loosening up. I think that the noble Lord has taken the point. In my reading, the charter seems to confine risk analysis to the probabilistic analysis of forecasts—to the fan charts and so on. I want to stimulate the OBR to think about the risks inherent in the economic posture, if we may call it that, of the country at any one time. On the two illustrations that I gave, I think that if forecasters, particularly official forecasters, had been sensitive over the last decade to the excessive share of taxation coming from the financial services and had realised the risk of having all one’s eggs in one basket or had been sensitive to the problems associated with the overall balance of the economy, which I know the Government wish to address, we might have had some danger signals hoisted earlier than they were. However, in the context of the Minister’s assurance that he will look at this issue and perhaps amend the charter accordingly, I beg leave to withdraw the amendment.

Amendment 20 withdrawn.

--- Later in debate ---

[Lord Eatwell]

My Lords, my noble friend Lord Peston suggested to me that I should follow the introduction of this group of amendments by the noble Lord, Lord Higgins, by speaking now to Amendment 39. As noble Lords will be aware, this is simply an alternative means of achieving the objective that the noble Lord, Lord Higgins, seeks.

One of the most important aspects of any piece of serious economic analysis is that it should be capable of being replicated. If the OBR’s forecasts are to achieve the status that we on this side and, I presume, the Government hope for them, they must be capable of being replicated. This can be done only if full information is available at the time of publication.

The issue of replication is typically associated with the natural sciences, where replication of experiments is a fundamental requirement of any empirical scientific statement. However, the Minister may be unaware that it is now standard practice for any article published in a leading applied economics journal to provide the electronic address at which the data and other relevant information required to replicate the results in the article are available. In these days of large datasets and complex econometric models, data accessibility is critical to effective peer review—even effective assessment of whether any analysis or forecast should be taken seriously.

Amendment 39, in my name and the names of my noble friends Lord Davies and Lord Myners, will ensure that effective appraisal of OBR forecasts and other economic analyses are possible. As is made clear in the preface to the OBR report that we discussed last week, compiling the fiscal forecast requires detailed information from many government departments. That is why our amendment refers not only to data and methods but to costings, which the OBR are required by the charter to confirm. In other words, all the raw materials on the basis of which judgments have been made and forecasts have been constructed should be available for objective assessments of those forecasts to be made. This will not involve any significant extra burden on the staff of the OBR, since the data and costings must already have been assembled in electronic form for the OBR to do its work.

The noble Lord, Lord Higgins, raised an interesting point about the model that might be used by the OBR. We have been told that the Treasury will retain its own forecasting unit. We would like to know whether the forecasting model to be used by this unit is to be the same as the model used by the OBR, in which case any differences in forecasts would simply be matters of judgment. That would surely be a ridiculous duplication. It would be much better to develop alternative perspectives, since they can often throw fresh light on difficult problems.

In supporting the general line that the noble Lord, Lord Higgins, has taken, I simply add that we want to be in a position where serious researchers can replicate the approach and findings of the OBR in order to be able to evaluate them effectively.

[Lord Peston]

My Lords, noble Lords will be aware from my remarks last time in Committee that I would not have set up an OBR. I regard it as a waste of public money, to be perfectly honest, but I entirely accept that we are going to have an OBR, since the Government have a majority in the other place and in practice seem to have a majority in your Lordships’ House. Therefore, I entirely agree with my noble friend Lord Eatwell that, if we are going to have such a body, we might as well make it a better one, rather than a worse one. Therefore, we have a duty to scrutinise the proposed legislation and come up with a variety of suggestions, in the hope of persuading the Minister that we could make a better fist of it than the Government have done so far. There I echo the remarks of my noble friend.

On this group of amendments, I repeat something that I said last week. The OBR’s November economic and fiscal outlook report produced a series of forecasts that are not based on any recognisable or explicitly stated economic theory. This is forecasting without theory, which is slightly different from forecasting without a model, although the two are connected.

I have found it difficult to discover from the economic and fiscal outlook report what assumptions the OBR has made—and, presumably, will continue to make—about the way in which the economy works. The central issue as far as serious economics is concerned is whether it is assuming that the economy is a self-adjusting mechanism that will come to a full employment equilibrium—the kind of assumption that what I regard as obsolete economics used to make—or whether it is taking for granted, first, that the economy will not come to an equilibrium at all or, secondly, that there are multi-equilibriums and it does not know where the economy is going to go. Whatever the case, many believe that, wherever it settles, it is most unlikely to settle at anywhere recognisable as a place of full employment.

On a related matter about the facts and how seriously we should take the OBR forecasts as they are now, we have available, as the noble Lord, Lord Higgins, pointed out, the immensely helpful survey published by the Treasury of all the independent forecasts, to which I shall refer further on Report. I have analysed the independent forecasts statistically and it is interesting to note that, given the averages, standard deviations and the other statistical criteria, the forecasts of the OBR and the independent forecasters for 2010 and 2011 are much in step. However, it is extraordinarily interesting to note that the OBR forecast for 2012—that GDP will grow at 2.6 per cent per annum and will continue to grow at that kind of rate—is remarkably optimistic compared with the forecasts of the independent forecasters; it is statistically significantly different. The OBR has not discussed this matter, nor have outside commentators, but your Lordships—we shall return to this issue on Report—have to ask how the OBR has come up with this optimistic view.

There was a time when the Conservative Party believed in the free market—those days seem long gone—and would have taken it for granted that, as the independent forecasters overwhelmingly are in the business of making money from accurate forecasting, they have a tremendous incentive to forecast accurately. Therefore, if one had a choice, one’s normal inclination would be to say, “If you believe in the free market, you will choose the free market forecasts as opposed to the OBR’s forecasts”. We shall return later to the significant issue of the optimistic OBR forecast for 2012 against the rather more pessimistic forecasts of the independent forecasters.

There may be two good explanations for the difference: first, many of the independent forecasters do not look that far ahead and we may have a biased sample of what we get from the Treasury; and, secondly, the OBR may have more information—for example, it may be better advised on government policy—than the independent forecasters. I am not saying that necessarily the OBR is mistaken; I am saying that the difference is, from any analytical and statistical point of view, noteworthy.

--- Later in debate ---

[Lord Eatwell]

I agree with the noble Lord that the amount of information that is published has increased, to general benefit. I spent a few happy hours over the weekend playing with the Excel spreadsheets on the OBR website and plugging them in to a model that I use to think about the economy. I found some interesting inconsistencies and will write to Mr Chote about them.

The point that has come up several times in our discussions concerns the balance between the Bill and the charter. The charter can be changed readily, as it is not primary legislation. We must give careful consideration to whether, for example, transparency as defined in the charter gives a sufficiently strong underpinning to the need to reveal information, or whether statements such as those in the amendment proposed by the noble Lord, Lord Higgins, or in those proposed by me and my noble friends, should be in the Bill. This has come up several times. It is an issue that we should take away and consider carefully before Report. Where should we strike the balance between an explanatory charter that gives guidance to the OBR and the statutory requirements? I do not have a firm opinion. However, on this issue I lean toward the idea that it should be in the Bill rather than in content that could later be amended. Of course, it would have to be put before Parliament—we know the charter procedure—but it can be changed. If we really care about this, perhaps we should put it in a form that cannot later be changed. This is a matter for future consideration.

[Lord Higgins]

My Lords, we are grateful to the Minister, who has clarified a number of points. I will come back to an obvious and fundamental one. I am still not in the least clear why we will have both an OBR forecast and an official one from the Treasury that will be useful for Ministers. I simply do not understand this.

[Lord Sassoon]

Perhaps I may clarify that. There will be one official forecast, which the OBR will produce. The Treasury will retain a modelling and forecasting capability, but it is absolutely not the intention, and will not be the case, that there will be another official forecast from the Treasury. Ministers simply require the Treasury to retain that capability, so that if, in circumstances that we do not at all anticipate, the Chancellor or the Treasury want to take a different view from that of the OBR, they will retain the capability of doing so. There is absolutely no intention that there should be anything other than one published forecast, which will be put out by the OBR.

[Lord Eatwell]

I do not quite follow that. If the Treasury is going to disagree, or at least have the capability of disagreeing, with a forecast put forward by the OBR, how can it do that other than on the basis of a forecast of its own? I note that the word “published” was slipped into the Minister’s final sentence. Surely if the Treasury is going to have the capability of assessing and disagreeing with the OBR model, it must have some forecast of its own.

[Lord Myners]

Perhaps I, too, may make a comment. I took the Minister’s reply to the question asked by the noble Baroness, Lady Browning, about situations where there is a difference between HMT’s forecast and the OBR’s forecast as confirming that the Treasury will be clear about the fact that its own forecast was different and that its policy decisions were informed by its own forecast rather than by that of the OBR.

--- Later in debate ---

[Lord Eatwell]

My Lords, from our side, the point is not that that capability should not be there, as it clearly should be. However, confusion was introduced into the discussion by references to a Treasury model and forecasts, which puzzled us all, as opposed to having a capacity to critique and develop the modelling of the OBR.

[Lord Higgins]

My Lords, I understand the argument of the noble Lord, Lord Burns, and I should like to think further about what has been said on this issue.

Perhaps I may raise a further point in relation to the model. Over the past 80 or 90 years, we have had a huge difference of view as to whether one should adopt a Keynesian or a monetarist approach to these problems. My impression is that the OBR now has an essentially Keynesian approach and that the monetary aspect does not appear in the discussion at all, other than to say, “Well, of course, the Bank of England is targeting inflation”, and let it go at that. However, as I have previously pointed out to the noble Lord, Lord Myners, and others, until we got into quantitative easing the Bank was concerned purely about the price of money—the rate of a single rate of interest—rather than the quantity of money.

I am not the least bit clear about the proposal as it now comes here and to what extent the OBR is taking monetary factors into account. Let me illustrate this by giving an example from many years ago. I am delighted to see that the basic approach to economic forecasting on page 28 is to decide on how much excess capacity there is and then to see to what extent aggregate demand gradually increases and absorbs that excess capacity. That was precisely the policy that we adopted in 1970 under the Heath Government. We said then, in the clearest terms, exactly what is being said now on page 28. Unfortunately, this was misinterpreted as a dash for growth and we were absolutely pilloried by those who said that the money supply had been going up very fast. In fact there was a big difference between the money supply, the money supply figures and what was happening to aggregate demand. The point that I am seeking to make is that this does not take into account the effect of quantitative easing, for example, or, if it does, I am not clear where that would appear in these forecasts, although no doubt the Minister can enlighten us.

Given that we are told that the Bank of England is going to make yet a third, quite different, forecast in addition to the, I am almost inclined to say, surreptitious one in the Treasury—I accept fully the point made by the noble Lord, Lord Burns—I am worried that the fiscal and monetary side is not sufficiently integrated in the forecasts.

--- Later in debate ---

Moved by

[Lord Eatwell]

23: Clause 4, page 2, line 28, leave out paragraph (a)

--- Later in debate ---

[Lord Eatwell]

My Lords, at Second Reading it was acknowledged on all sides of the House that requiring the OBR to write what was referred to by the noble Baroness, Lady Noakes, as its own school report was not the best way of achieving an objective appraisal of the office’s performance. However well intentioned or even self-critical an organisation might be, it is inevitable that self-assessment embodies a number of allowances, or perhaps things taken for granted that have become embedded in the organisation and are not made explicit, with the result that the sources of any underperformance are not articulated as clearly as they might otherwise be. That is why the provision in the Bill for self-assessment is ultimately unconstructive and even damaging to the reputation of the OBR. Far better to have an external assessment—I will propose a form of external assessment later—that confronts all aspects of the forecasting, such as methods, data, sources, judgments and presentation. The greater credibility and novel insights of such an independent appraisal would enhance both the performance and the reputation of the OBR. The self-assessment procedure is unsatisfactory and it would be a great help if this provision were removed from the Bill by our acceptance of Amendment 23. I beg to move.

[Baroness Noakes]

My Lords, the noble Lord, Lord Eatwell, has already referred to the fact that I did not support the OBR carrying out an assessment of its own forecasts, as set out in Clause 4. I stick by that view, for the reasons that the noble Lord has given. However, I cannot support his amendment because, without another amendment, it would take out of the Bill a requirement for any assessment of the accuracy of OBR forecasts. I do not understand why the noble Lord has not grouped this amendment with later ones that would set up a peer review committee to perform this function. It would be a retrograde step simply to take out of the Bill a requirement for an analysis of the accuracy of the OBR’s fiscal and economic forecasts. I would rather have an unsatisfactory review than none at all.

[Lord Eatwell]

I was hoping to provide space for those who feel as strongly as I do, as apparently does the noble Baroness, Lady Noakes, to suggest alternative arrangements. Indeed, I have put forward my own proposals, which we will discuss later, but a variety of methods could be suggested.

[Lord Sassoon]

My Lords, I, too, am a bit puzzled as to why we are discussing only half the linked story, but my noble friend has it right when she talks about the defective nature of this amendment in taking out the requirement for an assessment of the accuracy of fiscal and economic forecasts. No doubt we shall come to the question of whether there is any other way of doing it later, when I might not be quite so keen on what she has to say. However, I certainly agree with her that it would be inappropriate to remove the requirement for an assessment of the accuracy of the forecasts. It is an important requirement that there should be such an assessment—

--- Later in debate ---

[Lord Eatwell]

While I agree with the Minister that doing an assessment yourself makes for a learning experience, having someone else do it makes for an even more pointed learning experience. I apologise to the Minister for the fact that he has been forced to speak half-heartedly about this amendment because he has not had the opportunity to discuss Amendments 40 and 43, which cover the issue and which I see as linked. I do not know how the grouping got made up in this way, but there we are. The noble Lord is suggesting that I did it. I can assure the Committee that that does not fall within my skill set.

[Baroness Noakes]

It should.

[Lord Eatwell]

I thank the noble Baroness, Lady Noakes. It is, as we say, a learning experience.

[Lord Higgins]

It is very simple. You ring up the Whips Office and say, “I don’t like the way in which it has been divided up”.

[Lord Eatwell]

I am grateful for the supervision. However, if we look forward, we will be discussing a set of amendments about which I feel very strongly in the context of reinforcing the powers of the OBR. If those amendments are accepted, that would require this amendment also to be accepted. While withdrawing the amendment at this time, I will be intrigued to see how the noble Lord, who will clearly appreciate the wisdom of my future amendments, manages to square accepting them with rejecting this one. In the mean time, I beg leave to withdraw the amendment.

Amendment 23 withdrawn.

--- Later in debate ---

[Baroness Noakes]

My Lords, the Opposition are getting overexcited this afternoon. The small phrase in the announcement made by my right honourable friend the Chancellor that there has been an audit of the AME savings is being considerably overinterpreted. As my noble friend suggested, it would be helpful if Mr Robert Chote were asked to say how he conducts this aspect of his work. I am sure that if there are then further questions that noble Lords wish to raise, they will be able to. It would be helpful if my noble friend references any material that is already publicly available. However, it is not reasonable to go beyond that this afternoon.

[Lord Eatwell]

While agreeing with the noble Baroness, Lady Noakes, I think that there is an important point here. If there is a process of scrutiny that is designed to give us a degree of confidence in the Government's costings and in the forecasts made by the OBR, it would be helpful to know, when the OBR scrutinises the costings by the various departments of their savings, whether it agrees with them 100 per cent. If it does, that would be very disturbing and unfortunate: it would be like an old Soviet election. We would expect a degree of disagreement—perhaps not much, but a bit—which would give us confidence in the scrutiny process. It would be helpful if the Minister would tell us whether in the scrutiny process the agreement was 100 per cent or rather less.

[Lord Sassoon]

I am grateful to my noble friend for trying to bring this back into perspective. Of course the OBR scrutiny, as the noble Lord, Lord Eatwell, acknowledged just now, will be based on challenging the assumptions underpinning the AME costings. How it then formed the judgments that it did is for the office, not me, to interpret. However, I am happy to point noble Lords towards what has been published and see whether there is anything else that the OBR thinks would be helpful to say on the matter after the discussion this afternoon. Clearly, the OBR will not sign off on its scrutiny of AME savings if it does not think that the methodology and the numbers are reasonable.

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[Lord Eatwell]

My Lords, when I prepared my speaking note for a discussion of this series of amendments to Clause 5(3), I wrote the following: “The intention behind Clause 5(3) is clear and sensible”. I now realise how enormously wrong I was in that observation, because, following our discussion last week, to which the noble Lord, Lord Higgins, has just referred, it is apparent that Clause 5(3) is neither clear nor sensible. These amendments give us at least an opportunity to talk around the issues and provide some material for the Government to help them to bring forward—as I hope and am confident they will—their own amendment to Clause 5(3).

Amendment 31 was prepared when I thought I knew what the clause meant: that the OBR should focus on developing a successful forecasting methodology and applying it to the evaluation of government programmes alone, keeping out of the arena of political controversy. The noble Lord quoted me on that just now and I stand by my belief that it should be the case. Even on these grounds, the clause is not well drafted. As I pointed out at Second Reading, it might be possible to conceive of opposition policies that do not impinge on government policies. My example was of an employment programme for which funding had been secured from the European Union so that there was no impact on the Government’s fiscal stance. Such a programme would not be an alternative but an addition to anything that the Government themselves were doing. Therefore, there is a degree of ambiguity as the clause stands.

My Amendment 31 seeks to eliminate this ambiguity by stating explicitly that in so far as OBR reports include an assessment of the impact of policies, reference should be made to government policies alone. I believe that my redraft of Clause 5(3) unwittingly achieves with far greater clarity what we now know the Government were hoping to do with their subsection, which is rather messy—indeed, hopeless—at the moment. It embodies the positive statement that government policies should be taken into account, which is what we were told it was supposed to do last time, and ensures by the use of “only” that policies emanating from elsewhere will not be part of the appraisal or forecasting activities. I think that I have actually cracked the Government’s problem for them.

It will be evident from what I have said that I disagree with the goals of the amendments moved by the noble Lord, Lord Higgins, which would take this out altogether, or tabled by my noble friends Lord Barnett and Lord Peston. I say that the OBR should focus on the Government alone and that it would be unfortunate if it were turned into a sort of policy referee. It might be possible if economic forecasting was a precise science, but it is not and there will always be a certain amount of judgment involved. It is not like a measuring rod with which you can say whether something is accurate. That is not what economic forecasting is about. At an appropriate time, I will move Amendment 31. I believe that the Government will bring forward something like this to solve the problems that we have identified in this part of the Bill.

--- Later in debate ---

[Lord Higgins]

My Lords, that is a very sensible reaction on the part of the Minister.

[Lord Eatwell]

Before the noble Lord withdraws his amendment, I agree entirely with the Minister that there is a clear degree of consensus on what we are all trying to achieve. However, there is a degree of consensus that Clause 5(3), as currently drafted, does not achieve it. When we have concluded Committee, I intend to write to the Minister about this matter and a number of others where I think that we have total consensus on what we want to achieve and even perhaps to suggest meetings prior to Report to sort it out. That way, everybody can be clear about and comfortable with what we shall in due course pass into law. Having said that, I really do not see how Clause 5(3) can survive as currently drafted but, given that we are now really clear about what we want to do, we can sort something out.

[Lord Higgins]

My Lords, the whole purpose of a Committee stage is to get to the bottom of certain difficult aspects of a Bill. I am sure that it is right that the Minister should look at the matter very carefully between now and Report, in particular with the parliamentary draftsmen. I have no doubt that the noble Lord, Lord Eatwell, and others can look at it as well. It might be helpful to keep in touch on whether we all agree on the amendment to table or whether we should put down alternatives. At all events, I beg leave to withdraw the amendment.

--- Later in debate ---

Moved by

[Lord Eatwell]

36: Clause 6, page 3, line 10, leave out paragraph (b)

[Lord Eatwell]

My Lords, Amendment 36 refers to Clause 6(1)(b) and seeks to remove the attempt to qualify Clause 5(2). I begin by confessing that, on close inspection, my amendment is imperfectly drafted. I did not wish to eliminate any guidance that the charter might provide with respect to the beleaguered Clause 5(3) because guidance is certainly needed there. However, if Amendment 31—or something like it—appears on Report, the qualification of Clause 5(3) will be unnecessary. The core purpose of the amendment is to remove the ability of the Government to use the charter to qualify Clause 5(2).

Noble Lords may think that the terms “objectively”, “transparently” and “impartially” are perfectly well defined by the Oxford English Dictionary and that no further guidance or qualification is required and, if they examined the draft charter, they would find that they were absolutely right to think that. Taking just one of the words which one would think would be easy to understand, I invite noble Lords to consider the charter definition of “objectively”. Paragraph 4.7 of the charter states that this means that,

“the OBR should not analyse or comment on the particular merits of Government policy”.

The problem is that the philosophical issue has been pushed on to another word because we now need a definition of the word “merits”, as I will illustrate.

In Clause 5(3), which we have toiled over for some time, the OBR is required—as we all agree—to consider government policies that are relevant to its forecasting duties. Let us suppose that the OBR demonstrates that a particular government policy results in an increase in unemployment—and one must give credit to the Government and to the OBR for now publishing unemployment forecasts—then, as it is universally accepted that unemployment is a bad thing, such an assessment will inevitably reflect on the merits of the policy. If it increases unemployment, that is a bad aspect of the policy and is a comment on its merits; it cannot be anything else. Therefore the definition of “objectively” has been qualified in such a manner that it no longer has the generally accepted meaning of the word.

If we accept the guidance of the charter, the OBR could not comment on what is happening to unemployment because employment and unemployment are universally accepted as merits and demerits. Trying to define these words is simply an exercise in exclusion and limitation. The words have clear, commonsense meanings. Moreover, as the noble Lord, Lord Turnbull, told me earlier, the word “impartiality” in government circles has already been defined by the Committee on Standards in Public Life. A definition of the word exists in government life and it does not require another one. If the Treasury definition were contrary to that of the Committee on Standards in Public Life, that would be very disturbing.

The question is: why do we need this? The fundamental danger in Clause 6(1)(b) is the possibility of further guidance distorting the normal meaning of words that are fully understood in common parlance. It is far better to rely on common sense in understanding these words. The lack of qualification gives them strength; any qualification would seriously weaken their value. I beg to move.

[Lord Turnbull]

I support the amendment, at least in so far as it relates to Clause 5(2), for much the same reasons as those set out by the noble Lord, Lord Eatwell. These words are meant to be drawn either from the seven tenets of public life set by the Committee on Standards in Public Life, or from the synonyms for them in the Civil Service Code. If there is any amendment to be made it is that Clause 5(2) should bring the words used into line with the accepted vocabulary that is used in these other documents. You would then dispense with Clause 6(1)(b) as it relates to subsection (2).

At Second Reading, the most telling criticisms that were made on an occasion where this initiative was largely welcomed, was the sense that independence was being granted with one hand by the Treasury and that another clause subtly began to claw it back, and that this somehow undermined the sense of true independence. We can dispense with this and, if any changes are desired, the wording of Clause 5(2) can be brought into line with the vocabulary that is used in these other statements of the values of public life.

[Lord Sassoon]

My Lords, I find this interesting because what the noble Lords, Lord Eatwell and Lord Turnbull, have said exemplifies why we need some back-up explanation of these terms in the charter. That must be the right place for it because the noble Lord, Lord Eatwell, started by saying that we could rely on the Oxford English Dictionary definition of the three terms but then went on to refer to the usage given to the terms by the Committee on Standards in Public Life. That in itself points out that, even on his construction of how these words should be used, there are at least two sources. I have neither the OED nor the committee’s statement in front of me, but I would be surprised if they were precisely the same. Then the noble Lord, Lord Turnbull, referred to the Civil Service Code.

In arguing for the amendment, the noble Lords have precisely explained the difficulty that we are in: however you do it, you go back to different sources for the meaning of these important terms. It is therefore important in the charter to try to tease this out. I agree that this could be done in a number of ways; it could refer to the OED, the Civil Service or a number of other things. However, this discussion has reinforced my view that somewhere we need to provide some guidance.

I shall give the Committee another example, very much in this space, about the kind of difficulty that we can otherwise get into, and this relates back to one of our previous discussions. The US Congressional Budget Office has an impartiality remit, but it defines “impartiality” to mean that it has to include analysis of policy proposals made by all political parties. I think that we all agreed earlier that that is precisely what we do not want the OBR to do, and that suggests to me that it is a reason why we need to give a bit of guidance in the charter for what the three critical terms mean. Indeed, Robert Chote himself, following questions on impartiality, told the Treasury Select Committee:

“I think you want to make sure that the remit of the OBR is agreed ex ante, rather than the subject of a contentious debate ex post on whether it is doing what people want it to do … if it is left to the OBR on its own to draw the line, there will always be people just below the line who will be disgruntled … which will reflect on the OBR”.

That was in the context of a wider discussion about the virtues of, and the need for, clarity.

Nothing is set out in the charter that can undermine the Bill. The guidance can relate only to functions conferred by the Bill; it cannot add to or distort them. Further, as we have noted, the charter must be approved by another place before it can come into effect. I have listened carefully to the debate, which has suggested to me that even those who say that we do not need the interpretation of the charter are actually using different definitions. I think that the charter is the right place in which to provide the OBR with the clarity that it quite rightly seeks. For that reason, and because the noble Lord admits that the amendment does not quite work technically, I ask him to withdraw it.

[Lord Eatwell]

I am grateful to the noble Lord. If we get Clause 5(3) right, it may work very well, but we have been chewing this matter over perhaps to excess. The Minister made one point about the issue of impartiality with respect to the Congressional Budget Office. While there is some relationship between the CBO and the OBR, the Congressional Budget Office is actually a creature of Congress. That is different from the OBR, which is a creature of the Executive. It means that we have a very different issue before us.

I am still disturbed by the definition of “objectively”. As I pointed out, the notion of merit and demerit is rather difficult in and of itself, and therefore, in preparing for the final draft of the charter, I would like the Government to consider whether the word “merits” conveys exactly what they want it to.

[Lord Sassoon]

I am not sure whether this will help, but just to be clear, we are expecting the OBR to assess the impact of policies on forecasts. So there is no question of merits and demerits, other than that we are trying to exclude all questions of merit and demerit and keep to the factual impact of policies. I am struggling a bit with any suggestion that we are somehow dragging the OBR into considerations of merit or demerit. The noble Lord took the example of employment and unemployment. All we ask of the OBR is that it should tell us what the factual situation is and absolutely not to comment on its merits or demerits. There is no question of enormity of judgment by the OBR in this or any other respect.

The basic underlying language here is the same as that which applies to the National Audit Office in the National Audit Office Act 1983. That is all we are trying to replicate in this respect, even though this is scrutiny and not audit.

--- Later in debate ---

[Lord Eatwell]

The noble Lord sounds like the fellows in my college whose standard reaction to any proposal of mine is, “We’ve always done it that way”. One peculiarity in the drafting of this Bill and of the charter is that everything is defined in terms of negatives. What we have in the charter is that the OBR should not analyse or comment on the particular merits of something. Why not say what you mean by using words such as, “The OBR should analyse or comment only on the impacts of Government policy”, as the Minister has just said? Why is everything defined in terms of the negative? Why can we not say what we want to achieve in positive terms?

The other problem with this is that I give the Government enormous credit for incorporating Clause 5(2) in the Bill. They deserve tremendous credit for doing that. However, subsection (1) weakens it, not necessarily as presented now, but it provides an opening for future Governments to change this guidance. That is what we do not want. It is unfortunate that this qualifying subsection is incorporated in Clause 5(2), which is tremendously to the Government’s credit.

I shall take away the Minister’s comments and think about them. In the mean time, I beg leave to withdraw the amendment.

Amendment 36 withdrawn.

--- Later in debate ---

[Lord Sassoon]

My Lords, of course the OBR should be cost-effective and efficient—there is no question about that—and the amendment seeks to increase the requirement for it to be so. However, in reality the amendment would not change in substance the requirement on the OBR because, if it was ever challenged on this point, the challenge would be subject to what it would have been reasonable for the OBR to have done. I agree with my noble friend that it would be nice if we could have more direct language here but I am advised that the amendment would make negligible difference. That is because if it was ever tested in a legal context—one hopes it will not be—the reasonableness of what the OBR had done would be encapsulated in the words “aim to”.

At the risk of the noble Lord, Lord Eatwell, jumping up again, I have to say that this is the same as the requirement on the National Audit Office, as set out in Part 2. It is not necessarily a good defence; I merely observe—

[Lord Eatwell]

We have always done it that way.

[Lord Sassoon]

Of course, in the wider context, the accounting officer will have to answer for the OBR’s cost-effectiveness and efficiency and it will be subject to the normal governance and scrutiny arrangements for public bodies. Those scrutiny arrangements will include an audit, I say advisedly, by the NAO, which will have the power to examine and report to Parliament on a number of matters, including the economy, efficiency and effectiveness of the OBR.

I thank my noble friend for trying to tease out what is going on here. It has enabled me to ask questions and to establish that the words as originally drafted essentially encapsulate the test that a court would use if the OBR was ever challenged. On the basis that we are trying to arrive at the same point, I hope he will withdraw the amendment.