Budget Responsibility and National Audit Bill [HL]
Lord Eatwell Excerpts(13 years, 11 months ago)
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Lord Eatwell
“( ) 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.
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.
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.
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.
Lord Eatwell
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—
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.
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.
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.
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.
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.
Lord Eatwell
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.
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.
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 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.
Budget Responsibility and National Audit Bill [HL]
Lord Eatwell Excerpts(13 years, 11 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Peston
Amendment 9 is grouped with Amendment 15, which my noble friend Lord Eatwell will speak to. I have discovered that the more work one does jointly, the more thoughts one has. Therefore, one or two things emerge from this amendment that had not occurred to me when I tabled it. I will mention what they are, but that does not necessarily mean that we should debate them today: we might save them for Report.
The amendment covers the role of the two or more other members. They are referred to in the Notes as non-experts. I had not thought through the implication, because the word is not used in the Bill, that the OBR people are the experts. At some point I shall try to find a way by which we can discuss the distinction between expert and non-expert. I assure the Minister that this is a probing amendment for elucidation. I am asking what the point is of having these people. Given that we have experts, what do they contribute? They cost money—I assume that they expect to be paid—and they will have to be serviced with briefings of all sorts. The point of the amendment is to ask generally why we need this class of member; and, secondly, if this is what the Bill intends and if we are to have them, to ask the OBR, which will want to appoint them: “Can you tell us why you need them in this broad category, and why you need these specific people?”. I was intrigued by the Notes saying explicitly that these people will not be experts.
My other point is that so far, the only thing that we have any practical experience of, given the operation of the OBR, is that these people are not experts in the sense that they are not economists. I assure the Committee that there are other experts in the world. One or two of my colleagues, particularly in the United States, believe that economics will develop into a universal science that will cover everything in the field of human knowledge. I do not hold that view. It seems to me that although the experts so far are economists, I can think of other areas of expertise that would class people as experts for the purposes of the Bill. I do not expect the Minister to talk about that today, but I will raise it on Report. Statisticians and businessmen have wide experience and could be classed as experts in this context. The point of this probing amendment is to seek enlightenment. I beg to move.
Lord Eatwell
My Lords, I want to speak to Amendment 15 in this group, which is tabled in my name and that of my noble friends Lord Davies and Lord Myners. The amendment seeks to provide a specific and important role for the non-expert members who, in the Explanatory Notes, are defined as non-executives. The role of the non-executives is very important indeed because, as we have already identified, the OBR is a strange beast. It is independent in an important way, or at least we hope it is, and yet it is an essential ingredient of policy-making within a particular department, mainly the Treasury. So it is not really a non-departmental public body as we know many independent bodies because it is very much part of the Treasury, and yet it is also very much not part of it. It is therefore important that we bolster the “not” side of that equation to ensure that not only is there the reality of independence in a way that I know the Government are seeking, but also the appearance of independence, which will be equally important, especially in more tempestuous political and economic times.
Amendment 15 seeks to clarify the role of the non-executives in a particular way. What is striking at the moment is that the non-executives have no role whatever except that of being involved in audit activity and the production of the annual report; otherwise, they simply make the tea for the experts. We want to give the non-executives a particular role, that of bolstering and supporting the independence side, let us call it, of the OBR. It will be done by requiring the office to include in its annual report an assessment of how the OBR and the Treasury have adhered to the terms of the OBR’s independence as set out in Clauses 5 and 6(2).
Noble Lords will recall that Clause 5 makes the particular point that not only does the OBR have “complete discretion” but, as set out in subsection (2):
“The Office must perform that duty objectively, transparently and impartially”.
One of the oddities of the draft charter is that it seeks to define the terms of Clause 5(2) which are perfectly well defined in the noble Lord, Lord Sassoon’s, favourite reference book, the Oxford English Dictionary. I do not see why we need any further definition, but we will come to that in a moment. The non-executives can comment on these provisions, but more especially they can comment on the provisions of Clause 6(2), which is the really crucial piece of independence in the Bill—the independence of method and of forecasting approach. That is because, as we discussed on Monday, the Treasury is to retain its own forecasting unit and the non-executives will have the responsibility of assessing whether the mutual influence between the two forecasting organisations compromises the OBR’s independence.
It is important that the Government should realise that forecasting organisations influence each other to a considerable degree in respect of introducing new and different ideas, concepts, judgments and methodologies. Moreover, first-class forecasting units interact with one another. That is absolutely inevitable at any level of serious intellectual endeavour. For example, in economic forecasting, the very method used can have a significant influence on outcome, and unwarranted influence on the outcome can be exerted as much by a debate over method as over judgment.
The role of the non-execs is simply to stand there as defenders of the independent side of the OBR, and we could give them the responsibility of reporting on that independence in their annual report. They would then have a specific, valuable and important role.
I admit that Amendment 9, tabled by my noble friend, is cast in much more general terms, but I think that it is seeking to achieve the same ends. It is seeking to define a role for the non-executives. I suggest that the statutory role that we are suggesting—as guardians of the independence of the OBR—will be of enormous value to the Government, to Governments in future and to the organisation itself.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, although the noble Lord, Lord Peston, says that this is not necessarily the opportunity to try to clarify what is intended, I think that it is worth spending a moment or two to try to tease out what is going on here, although from what both noble Lords said, it is probably now clear what is going on.
As I said at Second Reading, when I was first shown a draft of the Bill, it categorised the two groups as professional and non-professional. That was changed to expert and non-expert, but we are talking about, on the one hand, a group that is expert in the sense of having all the competencies to carry out the role of the OBR—so they are both expert and executive—and, on the other, another group of people who are described in the Bill as non-expert, but we are rightly talking about them as what they are in substance, non-executive. They might be expert or they might not, but the critical thing is that they bring to bear a degree of support and challenge that comes from a different perspective. If they happen to have some relevant expertise, fine, but that is not the point.
The so-called non-experts are non-executives, but are full members of the OBR, which means that they can help to carry out any of the OBR's functions beyond those reserved for the BRC. As I see it, their role will be principally one of support and constructive challenge to the executive members, just in the way that non-exec directors would normally exercise those functions. They may form part of some committee structure, if the OBR so decides—audit is a particular role often assigned to independent non-executives—and they will carry out an important role in safeguarding the independence of the OBR. I have no difficulty with the principle behind Amendment 15, spoken to by the noble Lord, Lord Eatwell. It is just a question of the best way to achieve that.
For a start, we have a statement from the Treasury Select Committee in its recent report on the OBR. It states:
“We will take evidence”—
from the OBR—
“regularly as part of the budget process. We will intervene if we believe the OBR's independence is threatened. We expect the members of the Budget Responsibility Committee or the non-executive directors to report any concerns they have to us. Only if it is independent will the OBR be successful”.
We completely agree with that and would expect both the executive and the non-executive members, whether collectively or separately, to report any concerns on independence. That is clearly implied by the whole nature of the construct. The non-exec non-experts must be people of independent mind and character.
The question is whether this needs to be written in further. My slight problem with requirements to report on things like independence on a regular basis is the risk of becoming formulaic. We want the OBR and the non-experts to report whenever they see any question of a lack of independence arising, and I hope that that will never occur, but my hesitation is that if you get people to report regularly it becomes another box that they tick and another standard sentence that they write. It may actually be more difficult for them to do what in substance there is nothing stopping them doing—there is every encouragement from the Government and from the Treasury Select Committee already—which is to raise any independence concerns in the appropriate way, which may not be in any particular form with any regularity.
I have noted the points that have been raised, but at the moment I am not convinced that writing more into the Bill will necessarily do anything but lock us in to one particular formula. However, I will reflect further on the points that have been put. For the moment, though, I hope that I have answered the questions that have been raised and that that is sufficient for the moment for the noble Lord to withdraw the amendment.
Lord Sassoon
That is a very helpful thought. I shall in another context say that the parallel with the MPC is not at all inappropriate. For example, in the MPC or the board of the FSA there is a good record in the UK in recent years of bringing in relevant experts from overseas. I entirely agree with the noble Lord’s thought.
Lord Eatwell
My Lords, I am grateful for the noble Lord’s reaction to our Amendment 15; he said that he did not have any difficulty with it in principle. He then suggested that the independence of the OBR should be guarded by an external body—namely, the Treasury Committee of another place. While I have enormous respect for that committee, it would be better to bolster the independence of the OBR within its own organisational structure, rather than relying on an external body to deal with this issue. That is what I was trying to do in my amendment.
The other aspect is that if it is clear that the important role of the non-execs is to bolster the independence of the OBR, it will affect the sort of person who is appointed. You will want people of stature and self-confidence who would be willing to make themselves unpopular in defending the independence of the OBR. That would be a particular sort of person. It is especially valuable that we do not rely on an external organisation and use an internal structure with the non-execs. After all, they are there; we might as well use them to do this job.
I understand the point that a regular report might become formulaic, but this is such a serious duty that serious people would not treat it in a formulaic manner. However, I will take away the noble Lord’s point and see if I can modify the amendment a little.
Lord Sassoon
I want to clarify one matter. I was not for a minute suggesting that the Treasury Select Committee would be the sole policeman of independence. Under the current construct without the proposed amendment, I absolutely regard the OBR to be the guardian of its independence—which it shows every signs of being fiercely committed to. I was merely using the wording of the Treasury Select Committee report to point out that there are already external pressures on the OBR from a number of directions, but in no way was I suggesting that it will not already be expected to raise concerns on independence. The reporting mechanisms could include the annual report that will happen anyway. I am simply suggesting that making that mandatory in the legislation risks a formulaic approach.
Lord Eatwell
As I have said, I understand that; but when you are in the executive position, as the very distinguished people you have been lucky enough to attract to run the OBR are, it is very easy, because you have to get the report out and do things, to be so immersed in the incredible pressures that you slip across boundaries. If non-execs are there, like a non-executive chairman with a chief executive, they could help with guidance and prevent that slip happening. If we give the non-execs this particular role, it will not only bolster the appearance of independence of the OBR—which is valuable in itself—but provide an important check in reality. Including that duty in the Bill would be so serious that I do not think that serious people would treat it in a formulaic manner.
Lord Peston
My Lords, I thank the Minister for his clarifications, particularly in relation to the application of the exec versus non-exec issue. My noble friend Lord Eatwell has made a powerful case and I am glad that the Minister will at least reflect on how independence will work. Even though one felt very frustrated on Monday by the Minister’s refusal to give a much bigger role to the House of Lords, I can assure him that as long as I am alive, I and my noble friend Lord Barnett will find many a way of making sure that the OBR is subject to the kind of criticism that will ensure that, whatever else it is, it is definitely independent.
Having said that, I would like to come back to the question of expertise, but that can wait until Report. I beg leave to withdraw the amendment.
Lord Eatwell
Lord Eatwell
A peculiarity of Schedule 1 as drafted is that the members of the committee who are required to have the relevant skills we have talked about are also required to obtain the consent of the Treasury Committee of the other place, whereas the non-execs are not. This is peculiar and unfortunate because, while there is a clear template against which to measure the members of the committee—they must have a suitable professional status within the economics profession, and especially within economic forecasting—the non-execs require a wider skill set. It would be inappropriate to spell out a particular skill set—even though my noble friend Lord Peston wants it in the Bill—because that is best assessed by the Treasury Committee and, if we wish to add it, the Economic Affairs Committee of your Lordships’ House.
What kind of things do we want? We want independence, experience, commitment, a clear interest in the issues at hand and an understanding—although not necessarily a high level of expertise—of the strengths and weaknesses of economic forecasting. We also want political independence, or at least political balance, within the structure of the non-execs. The Treasury Committee, which covers a multitude of sins, has the expertise to evaluate that kind of skill set. That is why Amendment 10 seeks to apply the kind of rigour and general assessment to the appointment of the non-execs as is applied to the appointment of the committee. I beg to move.
Lord Higgins
My Lords, I am a little worried about the remark “covering a multitude of sins” as I was chairman of the Treasury Select Committee in the other place for about 14 years—in fact, probably for most of the time that it has been in existence.
Lord Eatwell
If the noble Lord and the right reverend Prelate will allow me to explain, I was using the term in the same way as the Church of England covers a multitude of sins.
Lord Higgins
It will be interesting to know the Minister’s view on that one. I support the noble Lord in the view he has expressed. I welcome the fact that sub-paragraphs 1(1)(a) and (b) of Schedule 1 both require the Treasury Committee of the House of Commons to be involved. As I said at Second Reading, I think it is true to say that this is the first time that a Treasury committee in this sort of role has ever appeared in legislation. But like the noble Lord who moved the amendment, I am puzzled as to why the Treasury Committee should be involved in the case of the first two groups and not in the case of the third. It seems appropriate that it should be involved in all three. It is certainly appropriate that it should be involved in the appointment of the chairman, because the chairman plays a crucial role between the parliamentary side of things and the Executive nowadays, so that is very good.
I also remain puzzled as to why, under sub-paragraph (c) of Schedule 1, the two members are to be nominated by the OBR and then appointed by the Chancellor, whereas those under sub-paragraphs (a) and (b) are simply appointed by the Chancellor. No doubt the Minister can explain why the OBR should be in the nomination of the third group.
Lord Sassoon
My Lords, I have not had a chance to read that article. If we have another break, I shall go and do so. The arguments of the noble Lord, Lord Myners, are always powerful and coherent, but there are plenty of instances of where the appointment process does not, for all sorts of different reasons, necessarily have much to do with where reporting lines go. At the moment, quite properly, banks have to do a huge amount of reporting to the Financial Services Authority but the FSA does not appoint the boards of directors, who are appointed by the banks’ shareholders.
Lord Eatwell
But the FSA now interviews non-executive directors from major financial institutions.
Lord Sassoon
The FSA does not appoint the boards of directors. We are talking here about public sector boards, and I feel that there is little more to add. The Treasury Select Committee has not asked for this, and it does not happen with other appointments. Critical bodies such as the statistics authority work perfectly well under the sort of construct that we are proposing here.
Lord Sassoon
My Lords, on the latter point, I say again that the fact that it is intended that, as part of the nomination process, there should be an openly advertised way in will make it clear that we looked widely for the non-executives.
Implicit in the remarks of the noble Lord, Lord Myners, about the non-executive members not going through the process of getting the imprimatur of the Treasury Select Committee is the suggestion that all the non-executive board members of a huge range of public sector boards who do not go through parliamentary scrutiny are subservient and subordinate. I do not know why it should be different here. As I have explained, we are applying the same rigorous, high standards to these appointments as are applied to all other bodies. I see no reason why they should be subservient or subordinate simply because they have not had Treasury Select Committee endorsement.
The critical thing is that these are non-executive non-experts carrying out an important role similar to that of non-executives in a huge number of bodies across the public sector. That is very distinct from the expert members who, because of their special role at the heart of economic forecasting—the Treasury Select Committee agrees with this distinction—should be subject to the special veto.
Lord Eatwell
My Lords, having had the opportunity to listen to noble Lords who have taken part in the debate, I have become more convinced of the value of the amendment. My conviction derives from the following points. First, we must recognise that this is a very peculiar body, as a number of noble Lords have emphasised. It is of the Treasury but not in the Treasury. It is of the Treasury because it plays an important role in the formulation of the Treasury’s policy by providing it with the information and forecasts that are necessary for the development of policy. However, it stands outside as well. It is that independence with which we have all been concerned. Analogies with other public bodies do not work very well. This is a very peculiar body that we are trying to get right in the Bill.
Having listened to the arguments, the major reason why I am even more convinced of the value of the amendment is that I was involved in such a process when I was chairman of the British Library. I had a very tough and effective chief executive, and we tried to build a board that would serve various important roles at the library. However, we were continually—I was going to say “interfered with” but that does not sound quite right—guided in a very decisive way by the Department for Culture, Media and Sport, which is not one of the most powerful departments, certainly when compared with the Treasury. It played a very active role in the so-called independent nomination process. I was continually having vigorous arguments with the Permanent Secretary at the DCMS in which I would tell her to take her tanks off my lawn and allow us at least to nominate members, as was our right under the relevant Act. I am not convinced that the nomination process will be as independent as might be expected from looking at the simple structure laid out in the Bill.
The amendment would protect the Treasury and the Chancellor from the accusation that there was any compromise to the independence of the OBR in the nomination of non-executives by granting oversight to the Treasury Select Committee. The point is important. Members of the Treasury Select Committee are politicians, and therefore they are very sensitive to issues of political independence. It is what they know about and their area of expertise. They can spot political tendencies a mile off because they are experienced politicians and that is their job. Having listened to the argument, I have become much more convinced of the value of this amendment. I was a little tentative when I set out, but now I am convinced that it is the right thing to do. We will return to this on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Higgins
My Lords, on one occasion when the Government that the late Iain Macleod was opposing accepted an amendment, his response was, “You don’t shoot Santa Claus”. Perhaps that is an appropriate reaction in this instance. I am delighted to hear what the Minister has said.
Lord Eatwell
Before the noble Lord finishes, I should like to comment. I really am having road-to-Damascus experiences today; I now think that this is rather important, although I did not when we started. Yes, the OBR is moving out, but the point is that this is a Bill to establish that body for the long term. The Minister has said that it is up to the OBR to decide where it goes. Let us suppose that it decided to go back. Would that be acceptable? The answer, of course, is no. Having felt that the noble Lord, Lord Higgins, had tabled an amendment that had been superseded by events, I now realise that he has spotted a rather important point.
Baroness Noakes
My Lords, before the noble Lord, Lord Eatwell, gets too carried away with joining in with any opposition to the Bill, I want to point out that the Treasury is not a place, so the drafting of my noble friend’s amendment, while appearing Santa Claus-like, is in fact defective. There is a Treasury building but the Treasury could be anywhere. I think that he means “located in the same premises as Ministers and officials of the Treasury”.
We can take this too far, though. There might be circumstances in future when it is perfectly sensible for space in the same building as the Treasury is located to be occupied by the OBR. If the Treasury shrunk in size to proper proportions again and did not occupy as much of its building, some of it could be let out. What would be wrong with having the OBR even closer to save on shoe leather? We must not get carried away with this amendment.
Lord Burns
I support my noble friend Lord Turnbull and the noble Baroness, Lady Noakes. This amendment is totally unrealistic. To imagine that one should bar secondees from this kind of activity is extraordinary. There can be no real career structure within the OBR. There are specific sets of jobs and there will be little potential for advancement. It is bound to provide activities that people will take on for a certain period, after which they will move on to do something else. Inevitably, they will wish to hold on to their employment in a department which actually offers them the possibility of a career structure.
I think that the noble Lord hugely underestimates the independent-mindedness of many civil servants. During my time in the Treasury, and I am sure subsequent to that, we had many secondees from other departments who would work in our expenditure divisions. They would work effectively in support of the Treasury by running, very often, the expenditure policies relating to the departments from which they had been seconded. I had no difficulty with this. Indeed, when I first joined the Treasury, my noble friend Lord Kerr was on secondment from the Foreign Office to the Treasury in order to carry out the expenditure work of the MoD. These are everyday, bread-and-butter activities for civil servants, and I am confident that they can work very effectively.
Clearly there would be a problem if the executive members of the OBR were on secondment from the Treasury, but I assume that that is not what is in mind and that the mechanisms which have been put in place in terms of their appointments will safeguard against that. However, we must be realistic about these arrangements. As long as the senior people in the OBR are appointed under the correct processes so that they are independent, it should be for them to recruit the people who they think can carry out the tasks most effectively. To surround that with lots of restrictions is not only unrealistic but, as my noble friend Lord Turnbull said, very damaging.
Lord Eatwell
This is a tricky issue but the balance has been struck by a combination of the noble Lord, Lord Turnbull, and my noble friend Lord Myners. If the staff of the OBR is simply a rotating group of Treasury officials, the appearance of independence, which is so important to the OBR, will be endangered. We should remember especially the crucial independence of method set out in Clause 6(2). If it is a rotating group, it will carry with it the method that it brought from the Treasury. On the other hand, I recognise that we do not want to limit the career prospects of staff or the quality of staff; we want to get the best people we possibly can.
The Government cannot be complacent about this. The OBR will undoubtedly be under close scrutiny and it will not do for it to allow employment to be a revolving door connected to the Treasury. It is up to the Government to come up with an answer. If they want the OBR to have independence, they will have to find a solution to the staffing problem. I am afraid I do not have it; if I did I would offer it. Given its independent role under Clause 6(2), it is clearly a problem. However, I entirely agree that we should not in any way endanger the career prospects or the quality of the staff of the OBR.
Lord Higgins
My Lords, one could look worldwide and still fail to find better experts on the practical implications of this amendment than the noble Lords, Lord Burns and Lord Turnbull. There are obviously considerable practical problems and the Government have to face up to the fact that if these are insurmountable, then the argument that the previous arrangements on forecasting were biased and subject to ministerial interference and so on will be difficult to sustain if precisely the same people are making the forecasts now as were making them before.
The Minister shakes his head and I look forward to reassurance from him. However, one cannot simply let it rest and say that it does not matter because they are the same people. Given the overall intention of the creation of the OBR, one has the political problem that it should be seen to be independent.
Lord Eatwell
“( ) The budget for the annual operations of the Office for Budget Responsibility shall be published, and be available for scrutiny by the Treasury Committee of the House of Commons.”
Lord Eatwell
My Lords, a well known and effective method of controlling any nominally independent body is by controlling its budget. Under this Bill, the budget of the OBR is clearly controlled by the Treasury. In Schedule 1(15)(1), we are told:
“The Treasury may make to the Office such payments out of money provided by Parliament as the Treasury considers appropriate for the purpose of enabling the Office to meet its expenses”.
If the OBR were not behaving in a manner that suited the Government, perhaps by undertaking a number of extra studies that cast the implications of government policies in an unfortunate light, the easiest way to discipline those independent-minded souls without going into any fuss about independence would be to cut their budget, forcing them back to their core function. Control of the budget is an important means of controlling an organisation.
All that the amendment proposes is that the budget be published and made available for scrutiny by the Treasury Committee of another place. That would give the Treasury Committee the opportunity to have its say on whether any inappropriate limitations were being placed on the operations of the OBR. Amendment 16 provides the scope for the Treasury Committee to act as the financial champion and protector of the independence of the OBR.
Noble Lords may have noticed a theme running through the amendments that my noble friends and I have proposed. We are attempting to enhance the independence of the OBR, and I am surprised that the Minister is resisting that attempt. I beg to move.
Lord Higgins
My Lords, I presume that the Minister will confirm whether the budget is going to be published. If it is, clearly the Treasury Select Committee could have a look at it if it wished. It seems more likely, however, that it would be examined by the Public Accounts Committee rather than the Treasury Committee, having already been looked at by the Comptroller and Auditor-General.
Lord Sassoon
My Lords, let me see if I can help by making clear what is actually going on and what is intended here. The first point to bear in mind is that HM Treasury is not incentivised to underfund the OBR because it will be relying on the office to produce the official forecasts. We need to bear it in mind that the OBR provides a critically important component to feed into the Treasury’s economic and fiscal policy-making. I am not sure what the circumstances could be in which the Treasury would want to starve the OBR of funds because it provides such a critical service to the Treasury itself.
The second point is this. Noble Lords may not have seen it, but the funding has been put in place not for one year but is committed through the spending round period from 2011-12 through to 2014-15. The spending letter from Sir Nicholas Macpherson, the Permanent Secretary to the Treasury, has been published by the OBR. It makes it clear that the funding allocation is £1.75 million per year flat cash at a time when the Treasury group settlement is minus 33 per cent. The position for the next few years is clear. Sir Nicholas goes on to say in his letter:
“Should you find that you are unable to manage within the constraints of this allocation, please raise this with me at the earliest opportunity”.
So the initial funding is in place with an open invitation—which, as I have said, is very much in the interests of the Treasury—to the OBR to raise any matters of any potential underfunding. Robert Chote himself highlighted the importance of the OBR’s funding position when talking to the Treasury Select Committee:
“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”.
He is clear in the substance about where he would immediately go.
There are a number of specific safeguards in the legislation that go further. Schedule 1, which provides for the funding arrangements, ensures that the OBR’s independence and effectiveness will be protected. There will be a separate line for the OBR in the Treasury Estimate and the body will produce its own accounts which will be laid before Parliament. Furthermore, it will be able to submit an additional memorandum alongside that of the Treasury, which will be submitted to the Treasury Select Committee.
Lord Eatwell
Will the noble Lord give me the paragraphs in Schedule 1 in which those propositions appear, so that I can follow his argument?
Lord Sassoon
I will come back to the noble Lord on that: I do not have the Bill in front of me. The point that I was going to make was that there will be a role for both the Treasury Select Committee and the Public Accounts Committee in relation to the expenditure of the OBR. The Treasury Select Committee will take an interest in whether there is any pressure caused by inadequate funding of the OBR. In addition, because the accounts of the OBR will be audited by the National Audit Office, the Public Accounts Committee and the NAO can be expected to take a critical interest not only in the accounts themselves but in any conceivable underfunding that the accounts reveal. Any future Chancellor who attempts to impose any underfunding will get caught, both because the chairman can go to the Treasury Select Committee and can go public at any stage, and because the accounts will be subject to audit. It is paragraph 15 to which we should turn.
Lord Eatwell
I thought that it was, but paragraph 15 does not contain the propositions that the noble Lord suggested were in Schedule 1. Paragraph 15 is very short and consists simply of two short sub-paragraphs.
Lord Sassoon
Paragraph 15 provides for the Treasury to make payment of grants in aid from the resources devoted by Parliament, as reported in the Treasury Estimates. That brings with it various responsibilities to report the estimates, in this case in a separate line in the Treasury Estimates. I refer also to the production of accounts and the voluntary ability of the OBR to publish any additional memorandum that it wishes. In the incentivisation of all the parties concerned, and principally the incentivisation of the Treasury not to underfund, there is an alignment of interests.
Secondly, in respect of the formal reporting position, through the accounting, Treasury Estimates and the ability of the Treasury Select Committee, the Public Accounts Committee and the National Audit Office to look at the numbers, there are many formal structures. In addition, we have a funding letter agreed by the Permanent Secretary to the Treasury and the chairman of the Office for Budget Responsibility that covers the period up to 2014-15—a settlement that is markedly more generous than the Treasury's own and that contains an explicit invitation for the chairman of the OBR to come back to the Treasury at the earliest opportunity if they find that they are unable to manage within the constraints of the allocation. This is very important and, as with many issues that we are discussing today, there is no difference between us on the objective. There are plenty of safeguards already in place in the legislation and the development practice between the Treasury and the OBR.
Lord Eatwell
My Lords, I am grateful for the Minister's reply, although I am still confused about what he thinks is in Schedule 1 and what he thinks is not. I will deal with the points that have been made. First, the noble Lord, Lord Higgins, echoed by the Minister, talked about the role of the Public Accounts Committee and the Auditor-General. They will audit the accounts for honest and true accounting, efficient management of funding and so on, but they will not be sensitive to the issue of the independence of the OBR and its activities, and the degree to which they are constrained by budgetary methods.
Lord Higgins
Some years ago, the Comptroller and Auditor-General and the PAC agreed that the Comptroller and Auditor-General could carry out value-for-money examinations. So it could do that.
Lord Eatwell
Absolutely. I agree with value for money, but the issue that we are discussing is the independence of the OBR in the pursuit of its activities. It may have pursued a constrained raft of activities very efficiently, providing good value for money, but the issue is the constraint. The Treasury Committee would be sensitive to exactly that kind of issue. That is why I have incorporated the Treasury Committee into my amendment.
Lord Sassoon
Perhaps I may help the noble Lord on the point of sensitivity. He is absolutely right: the Treasury Select Committee is sensitive to the point and has taken it into account already. It may help him to know that the Treasury Committee issued a press release on 12 October—perhaps he has not seen it—headlined, “Treasury Committee Chairman Welcomes Chancellor’s Statement on the OBR”, particularly on this point. The press release stated that the chairman, Andrew Tyrie, said:
“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 to do our work”.
I am grateful to the noble Lord for raising the question of sensitivity, but I trust he notes that the Treasury Select Committee has already said that it believes that what is proposed meets its requirements.
Lord Eatwell
The Ministers might care to look over their shoulders; they are being handed advice.
There are two points here that the Minister is getting wrong. First, on the business of being incentivised, of course the Treasury is incentivised to fund the OBR to do the things that the Treasury wants it to do; it is not incentivised to fund the OBR to do things that it does not want it to do. That, I am afraid, dismisses the incentivisation argument. It just does not make sense.
The second point concerns the funding in the current spending round and the comments by Mr Tyrie about that funding, which I welcome, but which do not address the point made by the noble Lord, Lord Burns, about the future. That is what the amendment is about; it is not about what is happening now. As far as concerns the Treasury Committee, the launch funding seems to be adequate—maybe even generous—but the question is whether we are to provide a mechanism in the Bill that will prevent future Administrations using the budget as a constraint on the OBR. It is the most effective constraint of all because no one really notices it.
If we are going to secure the independence of the OBR in the Bill, we should take the position supported by the noble Lord, Lord Burns, and clearly by Mr Chote, who said, “I will be off to the committee”. Let us ensure that the committee has full information and powers to recognise the chairman of the OBR at an appropriate time, and to defend him. We are not talking about subvention or incentivisation. The incentivisation argument is false—it is the other way round—because, if the Treasury is incentivised, it is of course incentivised to stop the OBR doing things that it does not want it to do.
Let us think about the future of this organisation and ensure that it has the independence that we seek. I will return to the issue on Report, because it is important. I am most encouraged by the support of a former Permanent Secretary, who has identified this as an important issue.
Lord Sassoon
Since the noble Lord is coming to the end of his remarks, I wanted to put something into, if you like, his work plan for thinking more about this matter before Report. This is another point that I had thought hardly needed to be made. The grant-funded NDPB model which we are talking about is common to a great many credibly independent bodies such as the Advisory, Conciliation and Arbitration Service and the Equality and Human Rights Commission. I do not believe that there is any question of funding for other grant-funded bodies of this sort being compromised. They produce explanatory memoranda; the OBR can produce an explanatory memorandum, which will go to parliamentary committees for scrutiny. I simply put on the table that if the noble Lord wants to go on thinking about this, he should also consider the read-across to other NDPB models.
Baroness Noakes
Before the noble Lord, Lord Eatwell, takes this away to consider before he comes back on Report, he might want to look at the debates on setting up the Statistics Commission. Very similar points were raised at the time. Although it was a non-ministerial government department rather than an NDPB, the principles are exactly the same. When I sat on that side of the Grand Committee, the concerns were that insufficient resources would be made available to the Statistics Commission to enable it to do the work that it needed to do because it was to be subject to Treasury control.
One of the arguments, which I am not sure has been fully deployed, although many good arguments have been, is that the annual report required by Schedule 1 is the vehicle for the body—the Statistics Commission in that case, and the OBR in this case—to say exactly what it wants. The Treasury has no ability to stop anything being put in the annual report, which must be laid before Parliament. This is in addition to the undoubted ability of Robert Chote to get Mr Tyrie to obtain a Treasury examination if he thought there was a problem, which can be done by informal means. Therefore, Mr Chote has a formal means of bringing to the attention of the wider public any concerns that he has about funding.
Lord Eatwell
I am grateful to the noble Baroness. She has given me some ideas to think about. I will go away and think about these things. It would be nice if we felt that the Government were going to do some thinking as well. We have an important issue here, which we will perhaps relate to the annual report. That is an interesting idea and I will look up the debate to which the noble Baroness referred. In the mean time, I beg leave to withdraw the amendment.
Amendment 16 withdrawn.
Lord Eatwell
Lord Eatwell
As Amendment 19 bears on the debate we have just had, I thought that it would be entirely appropriate to go beyond our target and deal with it so that we can tuck it out of the way. Amendment 19 is intended to make clear exactly within what context the issue of sustainability might be considered. The term “sustainability” has no meaning in and of itself, as we have just discussed, unless we simply define it as “not spiralling out of control”, which I think everybody would accept as perfectly reasonable but somewhat trivial.
The reason that it has no meaning in and of itself is the interaction of the public finances with what is happening in the rest of the economy. It was very useful to see the first attempt at a discussion of sustainability by the OBR in its recent report. As I pointed out in my remarks on the Autumn Statement, the definition of sustainability which the OBR presents in that report is a surplus of 2.1 per cent of GDP on the Budget. I remarked then, and I remark again, that that is completely unsustainable. It is unsustainable because a Budget surplus of 2.1 per cent, with the normal balance of payments position of the past 10 years or so of minus 1 per cent of GDP, would imply that the private sector was accumulating debt at a rate of 3.1 per cent of GDP. That is unsustainable for the private sector.
I have already had some correspondence with Mr Chote on the matter. The OBR got that wrong, and it shows how difficult it is to encapsulate the notion of sustainability without referring to the general economic context. Let us take the example of Ireland, which was raised by the noble Lord, Lord Higgins. In 2007, prior to the crisis, the Irish Government were running virtually no deficit and had a debt to GDP ratio of 12 per cent, one of the lowest in the developed world. Yet they were pursuing an economic policy, with respect to what they were committing their banking sector to accumulate, that was unsustainable. If you just looked to the Government, everything looked great. They were pursuing exactly the policies that one would define as sustainable. If you took it in the context of the economic policy and the economy as a whole, it became unsustainable; just as the OBR has made the mistake in its report—I know that it will change it because it has good economists who will see the point very quickly—of pretending that a government surplus is the basis of sustainability.
Let us just look at the history: Governments have not had a surplus for 200 years but they have continued perfectly well. Indeed, it is important for the Government to run a deficit; otherwise there will be a major shortage of government bonds for pension funds and the insurance industry. In fact, our financial sector would be wrecked if the Government did not run a deficit. The Government can run a relatively small deficit, which will see the level of debt to GDP stable, perhaps even falling. That would be entirely sustainable and would not spiral out of control.
I suggest that introducing the phrase,
“in the light of the Government’s economic policy”,
solves the Minister’s problem. It says that we will look at sustainability in the round and it creates that notion of “in the round” for the OBR to work on. Once again, we have managed to solve a problem for the Minister, and I hope that he recognises that a solution has been provided for him. I beg to move.
Lord Eatwell
Perhaps I may follow up that point. If Clause 5(3) is supposed to in some sense incorporate the notion of government economic policies and the definition of sustainability, it is obscurantist to an extreme degree. The subsection does not say that, and normal reading would not reflect that. It is a sort of philosophical point suggesting, “Don’t listen to what I say; listen to what I mean”.
I must say that what is written here does not in any common-sense manner refer in a constructive way to the point that we have been discussing. It is nonsensical to suggest that the clause provides the qualification that is required. If by some extraordinarily convoluted legal argument it does, there is an extreme lack of clarity here, and it is the Government's responsibility to make this clear. There is a severe deficiency of drafting in the Bill if the clause purports to refer in a constructive way to the matter that we have been discussing.
Lord Newby
Everybody agrees on the substance. The problem is that the Minister is trying to turn words that are inelegant and the wrong way round to mean what we all agree on. Without wishing to claim the fee of a parliamentary counsel, it seems to me that we could deal with this simply by redrafting subsection (3) to read: “The office must perform that duty, taking account of any government policies that are relevant to the performance of that duty. It may not consider…”
Lord Eatwell
Absolutely. We have just heard clarity provided from this incredibly obscurantist piece of drafting. This subsection is a negative. It says:
“Where any Government policies are relevant … the Office may not consider”.
You are taken to the negative. The verb with operational significance in that sentence is “may not”. The noble Lord, Lord Newby, has hit the nail on the head. If one really wants to achieve what we are all trying to achieve, this subsection should be split into two with Clause 5(3) saying, “Take these things into account” and a new Clause 5(4) saying, “Don’t mess around looking at other people’s policies”.
Lord Higgins
When we consider my amendment which refers to Clause 5(3), I shall make a quite separate point. The noble Lord, Lord Newby, has essentially encapsulated what he wants to say. The problem for the Government is that we are saying that the OBR has to take into account the Government’s economic policy, whereas the noble Lord’s letter—and the debate on that lasted for an hour and 20 minutes on our first day in Committee—was concerned with saying that we must not under any circumstances allow the OBR to look at economic policy.
Lord Sassoon
I was going to make two points. There is a further important consideration here, which is that we have the draft charter in front of us. It is worth bearing in mind that paragraph 4.12 of the draft charter, at page 13, states:
“The OBR’s published forecasts shall be based on all Government decisions and all other circumstances that may have a material impact on the fiscal outlook”.
So it is quite clear from that paragraph that the published forecasts shall be based on all government decisions. It continues, in the first bullet point, or tiret, as the Treasury used to call it—I do not know whether it still does since the departure of the noble Lord, Lord Burns; I fear that it now calls them “bullets”. Anyway, in the first blob—
Lord Sassoon
They are slipping terribly. In paragraph 4.12, the first bullet point states,
“where the fiscal impact of these decisions and circumstances can be quantified with reasonable accuracy the impact should be included in the published projections”.
So we have in the charter a lot of the clarification, if there is any doubt to be avoided. I think that we have exposed all the issues here. I believe that between the two clauses and the charter, we have covered it all. I will look at the issue again in the cold light of day with officials. If, on reflection, there is anything more, I will write with further thoughts, but in the mean time, I ask the noble Lord to withdraw the amendment.
Lord Eatwell
I am grateful to the noble Lord. This debate has been much more valuable than I expected when we started. We discovered in the imperfect drafting of Clause 5(3) a real drafting difficulty, which has nothing to do with trying to make any political or more general economic point, but just concerns clarity. That was very valuable. I want to return to this, and want to associate with the notion of sustainability a general notion of economic policy. The reason for that is illustrated by the Irish case. The Irish Government looked incredibly stable in 2007, yet the overall economic position was completely unsustainable. If you just looked narrowly at the government finances, they looked terrific, but once you placed those government finances in the context of what was happening in the financial sector in Ireland as a whole, taking into account the Government’s economic policy with respect to the banks, for example, you would have seen that the position was unsustainable. It is that broader context that I was trying to get at here, and which informed my remarks on the sustainability analysis in the report published on Monday. We have teased out some important issues here, and we must certainly return to them on Report but, in the mean time, I beg leave to withdraw the amendment.
Autumn Forecast
Lord Eatwell Excerpts(13 years, 11 months ago)
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Lord Eatwell
My Lords, I am grateful to the noble Lord for repeating the Statement made by the Chancellor of the Exchequer in another place. I agree entirely with him that there is a refreshingly independent tone to the OBR report. However, the Chancellor’s Statement is old-fashioned spin and I shall try to untwist it a little.
The Autumn Statement embodies a wide range of forecasts on aspects of the UK economy, on fiscal performance and on sustainability—a matter to which I will return later. However, as the Statement makes clear, once we attempt to forecast performance beyond two or three years, considerable uncertainty intrudes. For example, while the OBR suggests that there is a 50 per cent probability of the growth rate in 2014 being 2.8 per cent—the figure that the noble Lord quoted with certainty—it is also noted that there is a 10 per cent probability of growth being zero in that year and a 20 per cent probability of growth being zero or less.
This might be regarded as a little worrying, but it is, after all, four years on. Far more worrying is the fact that the OBR finds that there is a 20 per cent probability of growth being zero or less next year. So, to be reasonably safe, leaving aside these longer-term forecasts, let us focus on the current year and next year. Or, to put the matter in political terms, the year of Labour policies and the year of coalition policies, for the obvious reason that coalition policies can have had no significant effect on 2010, but will certainly start to have an effect on 2011.
So what does the OBR say about 2010, the year of Labour policies? Two factors stand out. First, in every forecast made by the OBR since the pre-Budget forecast of early June, the outturn in the economy has been significantly better than was forecast by my right honourable friend Alistair Darling in his March Budget. Growth has been steadily revised upwards and the deficit downwards—down now by a full one percentage point of GDP. These OBR results give the lie to the Minister’s persistent mantra that the situation that the Government found on taking office was worse than expected. In fact, month after month it has been consistently better than was expected in March. Let us hear no more of that fiction, and let us hear no more sneering from the Chancellor about my right honourable friend’s political forecasts. As the OBR itself made clear in its press release in June, Mr Darling was in fact overly cautious, a truth that has been borne out by subsequent data.
Now let us turn to what the OBR has to say about coalition policies. In June the OBR forecast what the impact would have been if we had just left Labour’s Budget in place for the next five years. Today we have the OBR forecast for the impact of coalition policies, and what do we find? In 2011, growth is down. In 2012, growth is down. By 2014, the coalition has at last caught up with the Labour growth rates—but then, four years hence, who knows what extra follies it will have committed?
Before turning to some wider economic issues in the Autumn Statement, I want to ask the Minister a couple of more technical points about the document. First, in paragraph 3.5 on page 27, and indeed elsewhere, the OBR makes it clear that the fan charts that the Minister referred to, which express the probability of particular outcomes, do,
“not represent our subjective assessment of the specific upside and downside risks that we see to this forecast”.
Why not? Why are we presented, in this long and important document, with an assessment of risks to the economy that the OBR does not actually believe? Is the hidden assessment of downside risk greater than that set out in the Autumn Statement? Surely we have a right to know.
Secondly, the OBR notes in paragraph 4.124 on page 119 that the estimates of the Government’s fiscal position do not include the likely impact of the sale of shares in the Royal Bank of Scotland and Lloyds Banking Group. Why not? Surely, given the enthusiasm with which the OBR has graphed analyses of uncertainty, some probability could be assigned to a central estimate of receipts from such sales. Perhaps the Minister will give us his estimate of such receipts and the impact on the overall deficit programme.
Thirdly, and most importantly, since it is an important part of the mandate of the OBR, is its consideration of long-term fiscal sustainability. In this consideration, starting at paragraph 5.27 on page 140, the OBR concludes that government policies imply a long-term budget surplus year after year of 2.1 per cent of GDP. This simply cannot be right. If the balance of payments is roughly zero or, as over the past decade, shows a deficit of about 1 per cent of GDP, then a long-term budget surplus of 2.1 per cent means that private sector debt is being accumulated at over 3 per cent of GDP a year—just the sort of private sector debt accumulation that brought about the recent crisis. Is this what the Government define as sustainability? This is truly an economy built on debt.
I am particularly worried about that point, as it echoes the Government’s fundamental misunderstanding of what has happened to fiscal balances over the past three years. That should be corrected by the OBR analysis in box 3.3, which shows that the fiscal deficit growth was directly linked to a sharp increase in savings in the corporate and household sectors. If government spending had not offset that increase in savings, the fall in output would have been truly calamitous.
A key element in the estimates in the Autumn Statement is the Government’s shift of spending cuts, as the Minister noted, from departmental spending to the welfare budget; this is clearly spelt out in table 4.16. Does the Minister agree that there is to be a cumulative reduction in DWP benefit payments of £9.1 billion over the next five years and a reduction in child benefit of a cumulative £7.9 billion over the next five years? This Government are attempting to balance the budget by squeezing the poor and by squeezing children.
We will await with interest the Government’s review of corporation tax. If I may be given the indulgence of making a forecast, the Government will find it far more difficult to simplify rules on controlled foreign companies than they might expect. But when do the Government expect the results of the review to be announced?
We on this side are delighted that the Government have announced a cross-cutting government growth review—about time too. Perhaps it will involve somewhat smaller cuts in investment—in public investment—than the Government currently plan. But what has actually been announced today? The only substantial announcement in this document is the investment programme by GlaxoSmithKline, which everybody welcomes. Everything else consists of rhetorical promises. When will we have a concrete growth strategy to replace this wishful thinking? When will the Government publish their long-awaited growth White Paper?
We on this side of the House welcome the financial assistance to the Republic of Ireland. It is certainly late; let us hope that it is sufficient. I was, however, a little puzzled by when the Chancellor said:
“In principle our bilateral loan is for £3.25 billion…”
What does “in principle” mean in this context?
What is made clear by this Autumn Statement is that there is as yet no sign whatever that the Government’s gamble of cutting living standards for the next three years is going to pay off. The policies that underpinned a solid recovery this year are being put into reverse. It is the poor who are paying the price.
Lord Sassoon
My Lords, forgive me but which of the questions of the noble Lord, Lord Eatwell, are we talking about?
Lord Eatwell
It was the point about assistance to Ireland—I believe that the relevant figure is £3.25 billion—being preceded by the words “in principle”; that it would be that sum in principle.
Lord Sassoon
My Lords, forgive me, I should have pointed out that the details of the package are still subject to final negotiation. I guess that the lawyers have to trawl over the press release, as it were, and my right honourable friend’s statement that the loan is not the loan until it is absolutely bolted down in the formal documentation. The terms of the loan are still subject to final negotiation alongside the IMF and eurozone packages.
Budget Responsibility and National Audit Bill [HL]
Lord Eatwell Excerpts(13 years, 11 months ago)
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Lord Eatwell
Lord Eatwell
My Lords, before we start our discussion of the Bill, let me say how grateful I am to the Government Chief Whip for postponing the beginning of this Grand Committee until now. It would have been impossible to have prepared a reaction to the Autumn Statement in time without her indulgence, for which I am most grateful.
There is an inconsistency in the Bill, which Amendments 1, 3 and 4 in my name are designed to correct. The inconsistency derives from the fact that the charter, which is referred to in Clause 1, is supposed to provide guidance as to the main duties outlined in Clause 4. Clause 4 lists those duties as sustainability, fiscal forecasts and economic forecasts, yet Clause 1 calls for guidance only on fiscal and sustainability issues; it makes no mention of economic issues. That is the core inconsistency.
The issue to be addressed is rather more than formal, as sustainability issues and, indeed, fiscal balance are not independent of economic performance. For example, it is quite possible to have a sustainable very small state or a sustainable very large state. Equally, it is possible to have a sustainable stagnant economy and a sustainable dynamic economy; in fact, I am sure that that is what the Minister would claim the coalition is creating. More specifically, different assumptions about the performance of the world economy as a whole will impact on the fiscal forecast and on any concept of sustainability. If we are to provide consistent advice in the charter to the Office for Budget Responsibility under its duties in Clause 4, the amendments in my name, which would introduce the word “economic” into the clauses, should be accepted.
Moreover, the charter introduces a fourth element, which is the promotion of “intergenerational fairness”. It would be helpful if the Minister could, when he sums up, define exactly what this means. Perhaps I could help by setting out what it cannot mean. It cannot have anything to do with the fiscal balance as such, as the size of a deficit defines the content of redistribution between different groups of current and future generations of UK citizens—essentially, redistribution between taxpayers and lenders. It certainly has nothing whatever to do with redistribution between generations. What it can mean is that there is some impact on investment and the growth path of the economy, but that is very much economic policy—the very dimension that has been left out of Clause 1. That is why I want to introduce the word “economic” into Clause 1. I believe that this is exactly the point that my noble friends Lord Peston and Lord Barnett make in their amendment in this group. To make this entire story consistent across Clauses 1 and 4 and the reference to the promotion of intergenerational fairness, it seems imperative to introduce the word “economic” in the places suggested in the amendments. I beg to move.
Lord Higgins
I am having some difficulty in tracking down the reference to intergenerational transfers. Am I right in thinking that the wrong line is given in the noble Lord’s first amendment?
Lord Eatwell
It is in the charter, which is referred to in Clause 1, and I shall attempt to find it for the noble Lord. I have a fresh copy here rather than my marked-up copy. Paragraph 3.1 of the draft charter states that an objective is to “promote intergenerational fairness”.
Lord Peston
My Lords, I shall speak specifically to the amendment in the name of my noble friend and myself, but what I say will also be very relevant to the other three amendments in the group.
Overwhelmingly, economists—I certainly include myself here—regard budget responsibility, or more generally financial soundness, as desirable, but within serious economics that desirability would be a means and not an end in itself. The end that one would have in mind in asking, “Why financial soundness?”, or, “Why financial responsibility?”, is the behaviour of the real economy. I know nothing in economics that tells anybody anything other than that the behaviour of the real economy is what we should be concentrating on. That is the specific purpose of my noble friend’s amendment and it is quite specifically the purpose of Amendment 2.
Noble Lords whose memories go back a long way will realise that the amendment in my name and that of my noble friend Lord Barnett is simply an echo or, perhaps more than that, more or less a restatement of Section 11 of the Bank of England Act 1998, which set up the Monetary Policy Committee of the Bank of England. Essentially, it is derived from the very famous subject of that section. We wish precisely that to appear in this Bill. Indeed, it would be absolutely absurd for the Monetary Policy Committee of the Bank of England to take account of Her Majesty’s Government’s economic policy for growth and employment—the real economy—and for the OBR not to do so. It is difficult to think that anyone could rationally have talked themselves into that position and I cannot believe that that is the position that the Government want.
Lord Eatwell
I introduced the charter into this in the sense that Clause 1 refers to the charter for budget responsibility and we have the draft before us. I do not think that it will be subject to parliamentary scrutiny. It will be placed before Parliament but will not be subject to scrutiny. I was therefore taking advantage of the Committee because, as the draft charter has been published, we have the opportunity to discuss it.
Lord Newby
Just as a point of clarification for the noble Lord, Lord Eatwell, Clause 1(7) states:
“The Charter (or the modified Charter) does not come into force until it has been approved by a resolution of the House of Commons”,
so it has at least vestigial parliamentary scrutiny.
Lord Sassoon
I shall explain the way I see it and deal with the things that may be relevant this afternoon. We are talking about the charter, which we have produced in draft to aid scrutiny of the Bill. I hope that people will think that that is helpful. There were, quite rightly, demands to see it, which is why we produced it a week ahead of the Committee stage. It will be formally laid in another place following Royal Assent to the Bill, so it necessarily remains in draft until that point. We will listen carefully and, if there are issues that touch on the charter that could in our judgment improve the drafting, we will take them on board.
The relevance of the charter is how it fits with the architecture relating to the responsibilities of the OBR. We also have to remember that certain things in the charter do not directly relate to the fiscal mandate but are background information to it. I take the point that we should not get too far into discussions of irrelevant things, but intergenerational fairness is part of the fiscal objective that is in there as background information to the fiscal mandate, which comes in the subsequent paragraphs and links directly to the responsibilities of the Office for Budget Responsibility. The noble Lord, Lord Eatwell, is correct that intergenerational fairness can take on different definitions, but here we are using the term in a fiscal context to mean that future generations should not be burdened by deficits or the cost of servicing debts accumulated to pay for consumption by current or previous generations.
Lord Eatwell
That was the point that I was trying to make in a speech that I made in the House the other day. If there is a deficit and you are paying interest on that deficit, it sounds like a burden, but you are paying it to the people who lent you the money and they are predominantly other British citizens, so all that you are doing is transferring part of national product from one lot of British citizens—the taxpayers—to another lot of British citizens, the lenders. You are not actually creating an intergenerational transfer. An intergenerational transfer can be made, as the noble Lord, Lord Higgins, pointed out quite accurately, by changing the volume of investment in any one year, which changes the growth rate of the economy and affects future income per head. A fiscal measure alone is not an intergenerational transfer.
Lord Sassoon
I am grateful to the noble Lord, Lord Eatwell, for his explanation of how intergenerational transfers work. I am not sure what difference it makes to the analysis but, for better or worse, it is not the case that substantially all of the debt—he did not use that term—is held by UK citizens or bodies. The burden of debt that we have is well spread among international holders as well.
We should not get too far side-tracked. Intergenerational fairness is an important point, but the objectives for fiscal policy are, as I say, the background in the charter. People can see the context in which the critical elements of the Treasury mandate are set out in paragraphs 3.2 and 3.3 of the draft charter. Those are the two elements that bite particularly on the mandate of the OBR. The full objectives for fiscal policy include supporting and improving the effectiveness of monetary policy, which relates to the independent operations of the Monetary Policy Committee of the Bank of England. We must remember how the architecture fits together.
Let me say a bit more about the background to the charter. Its purpose is to improve the transparency of the fiscal policy framework and, within that, to include the guidance on the role of the OBR within the broader framework. The charter is concerned with fiscal policy and includes the Treasury mandate for fiscal policy. It was important to have that document for people to see ahead of this discussion. The fiscal policy framework is part of the Government’s overall approach to economic policy. Indeed, given the fiscal situation that the Government inherited, the coalition made it clear on its formation that reducing the budget deficit and setting public finances on a sustainable path to build confidence and to create the conditions for economic recovery were the overriding priority.
The noble Lord’s first amendment would require that the charter be expanded to relate to overall economic policy. Amendments 2 and 3 concern the addition of economic policy objectives, which means that we need to be clear about them. They are set out in the paper The Path to Strong, Sustainable and Balanced Growth, which was published today. To achieve the objective of delivering growth that is consistent with values of freedom, fairness and responsibility and to improve the well-being of the British people, the Government must employ all their macroeconomic and microeconomic policy tools and frameworks. I mentioned that monetary policy is operated by the independent Monetary Policy Committee of the Bank of England. That provides one set of tools that play a role in meeting the Government’s economic policy objectives.
It may be helpful to remind the Committee that the Bank of England Act 1998 provides:
“In relation to monetary policy, the objectives of the Bank of England shall be … to maintain price stability, and … subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.
I know that comments have been made about that, but it is probably not right this afternoon to go into the question of how all this works. The point is that the Bank of England Act does not set out the Government’s economic policy objectives. That is not what we are trying to inject—nor should we—into the legislation that governs the operation of the Office for Budget Responsibility.
Financial stability policies are similarly crucial to delivering the overall economic policy objective. The Government have taken steps to reform the financial stability framework, providing the Bank of England with control of macroprudential regulation and oversight of microprudential regulation. Also, microeconomic policies create the conditions for growth and they, too, are essential. Fiscal policy represents another crucial set of tools that the Government use to achieve the overall policy objectives. The charter is the place where, for the first time, we have a transparent exposition of the framework. However, the charter is not itself the framework. It replaces the code for fiscal stability, which was part of the previous fiscal framework. Replacing that code was recommended by the Treasury Select Committee. The code did not contain economic objectives. Therefore, the charter remains a document relating to fiscal policy and should not be expanded to contain overall economic objectives.
Lord Sassoon
We should not prolong this for too long—although I am happy to. If I feel, having heard the arguments, that I should take the amendments away or that I should accept them, I will say that. I will try to tell noble Lords what I believe, but I do not believe that these amendments have any merit. If there are amendments that I believe have merit, I will endeavour to make that abundantly clear.
Lord Eatwell
My Lords, I realise that this is the first time that the Minister has had to face a Grand Committee and perhaps he will be better prepared next time we meet. However, as to these amendments, I have just four points to make in response to our debate.
The first is purely technical, in that the Bill as drafted is inconsistent. Clause 6(1)(a) states that the charter for budget responsibility may include guidance about the,
“assessment or analysis required to be prepared under subsection (3) or (4) of”,
Clause 4. However, subsection (3) of that clause refers to “fiscal and economic forecasts”. The charter is therefore required by Clause 6 to provide guidance on economic forecasts. The Bill is inconsistent if “economic” is not included in Clause 1. It is not at all clear what the Government really intend to do. It is only clarity that I seek here. As noble Lords have said, there is no great economic or political point behind all this. Actually, there is a good economic point, but there is no great political point. The amendment aims purely at making the Bill consistent.
My second point is that, in its consideration of fiscal policy, the OBR has to have some guidance as to the Government’s overall economic policy. Otherwise, it is not possible for the OBR to make a coherent assessment. If you do not believe me, just look at this document, the OBR’s Economic and Fiscal Outlook, which is exactly that. It is a very fine document, if I may say so. For example, the delayed rebalancing scenario and the weakening demand scenario are discussed in the document. Why is that? It is because the OBR is linking different economic performance to the consequences for fiscal performance. That is exactly what this document does.
I accept the point made by the noble Lord, Lord Turnbull, that we are not trying to set out some broad economic assessment committee, but, as another gloomy Cambridge economist, he should recognise that there is a clear interrelationship between economic and fiscal policy. The intention of these amendments was simply to capture that relationship. If this could be done in a better way and could make the Bill consistent, I would be very happy. If the Minister says, “We’ll think about this and see if we can achieve that in a better way”, so that this document does not trespass beyond the mandate given by the Bill to the OBR, I would be very happy.
I turn to Amendment 4. The Minister asked why the fiscal mandate should require an economic dimension. Here, there is a bit of economics involved, because there is a view among some economists that the economy has a normal rate of activity and a normal rate of employment to which it persistently returns having moved away from them because of some economic shock. It is clear that that is not the view of the economists who wrote this document, otherwise they would not have written such scenarios. It recalls the remark of the Nobel Prize-winning economist, Professor Robert Solow, that this view of policy was a vision in a dream. The fiscal mandate requires some economic dimension, because you could have different results depending on the nature of your economic policy—they are interlinked. That is all that I am trying to capture in my amendments—nothing more and nothing less.
I say in response to the noble Lord, Lord Oakeshott, that I do not think that the drafters of the charter know what “intergenerational fairness” means or what the economics of intergenerational transfers consist of. The noble Lord, Lord Higgins, got it exactly right: it is about changing the rate of investment in the economy. It has nothing to do with fiscal policy as such and it should not be in the charter. The suggestion of the noble Lord, Lord Oakeshott, that the word “intergenerational” be removed would provide some validity to a sentence that currently has none.
I am afraid that I must reflect the general opinion around the Grand Committee that these points have not been answered; indeed, I am not clear that they have been understood. Accordingly, I shall need to return to them on Report, by which time some more careful thinking about them will hopefully have been done.
Lord Sassoon
We have gone into territory in this discussion that is well beyond the consistency of the Bill. Consistency is important and we of course want to get it right. I see no difficulty in having consideration of an economic forecast, as provided for by Clause 4(3)(a), without there being a government statement in the charter on broader economic policy. I accept that there is a critical need for the OBR to make an economic forecast to underpin its assessment of the fiscal mandate, but I am still struggling to grasp the point on consistency.
Lord Eatwell
Perhaps I could help the Minister. Clause 6(1)(a) requires the charter for budget responsibility to give guidance on how to pair subsections (3) or (4) of Clause 4. Subsection (3)(a) of that clause refers to “fiscal and economic”. The charter must therefore include guidance on “economic”. At the moment, it does not.
Lord Sassoon
We are possibly getting this a little confused. Of course, in order to make an economic forecast, it may be appropriate for the charter to give, as it does in paragraph 4.10, guidance on economic forecasts, but that is very different from setting out in the charter the Government’s broad economic policy objectives. It is unnecessary, distracting and inappropriate for the charter to go into the broad economic policy objectives of the Government. However, I quite see that it is appropriate for the charter to go into questions that touch on economic forecasting. Indeed, it already does that, which is completely compatible with the terms of the Bill.
I will of course look again if it is a narrow consistency point. However, in trying to make a consistency point on what does not, from my reading of the Bill, need to be tidied up, the amendment opens up a much bigger swathe of territory, as I am sure the noble Lord is well aware, by including in Clause 1 broad questions of economic policy objectives. Yes, it is appropriate to talk about economic forecasting guidance in the charter—indeed, it is there—but its being there is much more specific and appropriate than opening up the charter to economic policy which, I would suggest, is simply not relevant. We will have a look again at the consistency question. My reading of it is that we do not have an issue there, but I will look at it again.
On the intergenerational question, I made the point that I am listening to what people say. I do not pretend for one minute to be an expert on the different interpretations and consequences of intergenerational fairness, but I will take back the suggestions that we have had on that from both sides of the Committee. Again, that is not something which, if there was any merit in changing the charter’s wording, needs any amendment to Clause 1 of the sort that we are discussing.
Lord Eatwell
My Lords, I am grateful to the noble Lord but there is a consistency point here, because the issue of timing the forecast is qualified by, “in particular”. The general role of Clause 6(1) is to provide,
“guidance … about how it should perform its duty under section 4”.
Those duties under Clause 4 include economic forecasts. I repeat that I have no intention of trying to create some general economic assessment. My main point is: economic and fiscal policy are intimately and necessarily linked. I was trying to capture that linkage in my amendment. I am quite willing to believe that my amendments do not capture it successfully, but it is capturing that point that I am looking for. I hope that, when we return to this on Report, that point will be appreciated and that the Government will be able to reply in some positive way about their response to this particular argument. In the mean time, I formally beg leave to withdraw Amendment 1.
Lord Oakeshott of Seagrove Bay
I rise briefly strongly to support the amendment. The noble Lord, Lord Sassoon, might be pleased to know that I had the pleasure of serving under the noble Lord, Lord Peston, for several years on the Economic Affairs Committee and sub-committee and he was as peppery then as he is now, so it is nothing personal. It was a worthwhile committee. You need only look round this Room to see the range of expertise and economic distinction available in this House. I remember that there was a former Chancellor of the Exchequer and very distinguished economists of all sorts. I endorse the remarks of the noble Lord, Lord Myners, and thank him for engaging more seriously with this House as a Treasury Minister than we have had in the past. That committee was excellent, and it could do nothing but add to the quality of debate and economic governance in this country to pass this amendment.
Lord Eatwell
I have a couple of comments to make on the amendments. With respect to the engagement of my noble friend Lord Myners in the House, that was increased by the noble Baroness, Lady Noakes, from the other side, who kept him working hard.
On the remarks with respect to the charter, there is a good point. The Economic Affairs Committee of your Lordships’ House takes a long-run view on fiscal affairs, which is what you want to get into this charter. It is about the whole philosophy that the Government have talked about. In the examination of the Finance Bill by the sub-committee of the Economic Affairs Committee, there is tremendous expertise considering technical aspects of fiscal policy. To quote another example of involvement by your Lordships’ House, I had the privilege of serving on the pre-legislative committee on the Financial Services and Markets Bill, which was a committee of both Houses. It enormously improved the Bill before it got to the legislative stage and saved a lot of time in the House.
With respect to the charter, my noble friends and the noble Lord, Lord Higgins, have hit on an absolutely central and valid point. On the amendment referring to appointments, it might be a little cumbersome unless we put the two committees together. What if the two committees disagreed? It would all become rather messy, so I am rather agnostic on that. The key amendment is Amendment 35. My noble friends have spotted an obvious oversight in the drafting of Schedule 1. Of course, the OBR should provide evidence to the relevant committees of both Houses. I am referring to evidence that is within the terms of its remit as defined in the Bill. If it is independent, it should be shown to be such by providing evidence in that way. We ought to have the word “reasonable” here so that reasonable requests for attendance can be made. After all, the OBR is rather small, and it cannot be attending things all the time. Whether the drafting is appropriate, I am not sure, but it is an entirely sensible point that when necessary the OBR should appear before committees in your Lordships’ House.
Lord Brooke of Sutton Mandeville
My Lords, I apologise to the Committee if I have acted improperly by rising after the noble Lord, Lord Eatwell. I tried before.
The noble Lord, Lord Higgins, and I at different stages in our lives were Treasury Ministers in different Administrations under different Prime Ministers. Both of us served for several years. Before that time, I had the privilege of serving as a Back-Bench Member on the Finance Bill when the noble Lord, Lord Barnett, was Chief Secretary. There is symmetry here with my first experience of the noble Lord as a tutor on the Finance Bill because he was extremely scathing about the first group of amendments that I tabled. My noble friend Lord Lawson of Blaby had to rescue me and explain that there was more to my amendments than the noble Lord, Lord Barnett, was suggesting. However, the reason why there is symmetry with this moment in the Grand Committee’s affairs is that the second time I moved amendments, which was the very next group, the noble Lord accepted them with enthusiasm, which was extremely good for a young pupil. We have just experienced everyone being mildly upset with my noble friend the Minister, but it is just possible that everything will be set right by what he has to say.
Two of my noble friends on this Grand Committee, as Conservative Peers, have taken opposite views of these amendments. Obviously there are things to be said on either side. I am going to extend the Minister the courtesy of listening to him, not least because that also seems to me one of the purposes of Grand Committee.
Lord Barnett
I do not agree with the noble Lord, Lord Higgins, on Amendment 21 because I do not see why the Treasury and the Bank of England should necessarily agree. Perhaps I may make one or two points about the previous replies that we have heard from the noble Lord, Lord Sassoon. He said that amendments are unnecessary because the powers are already in the Bill. Although they are unnecessary, equally one could say that accepting the amendments would do no harm to the Bill, as they would only be repeating what is in the Bill. He also made the case for reserving the power for the Commons—at least he has given us a reason for rejecting an amendment. I disagree with him. I reserve the right to consider the matter on Report because I see no reason why the House of Lords should not consider these matters.
Lord Eatwell
The amendments raise in different ways an important issue in relation to the draft charter. The noble Lord, Lord Turnbull, drew attention to paragraph 3.7, which states:
“The Treasury will continue to maintain the necessary analytical and macroeconomic expertise to provide on-going advice to the Government”.
That sounds perfectly sensible. However, it goes to the heart of the rather grey area of what OBR independence means that the same paragraph should declare:
“The Government intends to adopt the OBR’s fiscal and economic forecasts as the official forecast for the Budget Report”.
Indeed, according to the draft charter:
“The OBR’s forecasts are essential inputs to the Government’s ongoing policy-making”.
And yet, the Government retain the right to disagree. I can see that the Government can maintain the right to disagree with anybody, especially with an independent body—which the OBR is supposed to be—but I do not then see how they can adopt the OBR’s fiscal and economic forecasts as the official forecast for the Budget report. They cannot adopt something with which they disagree as the official forecast; it just does not work. They cannot have it both ways; it is nonsensical.
It is obvious that the OBR will need to work closely with staff at the Treasury and other government departments in developing costings. That is why we should expect consistency between the OBR’s forecasts and those used by the Treasury—after all, they have worked together to bring them to fruition. They are the crucial decision variables. In his foreword to the forecast document that we discussed in the Chamber today, Robert Chote thanks government departments for providing the decision variables which have gone into it. The OBR is in essence a rather peculiar body. It is not really a non-departmental public body; it is a Treasury non-departmental public body which plays a crucial role in the development of policy. As paragraph 3.7 of the charter precisely states, it is the “official forecast”. I do not understand how the Government can disagree with the official forecast. They can disagree with the OBR, for example, when it takes a punt in describing some scenarios, as it does in the charter, but how can they disagree with the official forecast?
I cannot see why there is a need to require consistency between forecasts put forward by the Treasury and those put forward by the Bank of England. The noble Lord, Lord Turnbull, referred to competition between forecasts. I would take a rather different view and say that to require consistency would endow forecasts with spurious precision, whereas there are number of judgments in forecasts which are worth discussing in the context of the formation of economic policy.
The underlying point is that the OBR is distanced from official policy-making to a degree that was not possible in the past. That is an achievement of which this Government should be proud. But to describe the OBR as “independent” is an exaggeration. It is useful for propaganda purposes, but it is not credible to grown-ups, because it has to be involved in policy-making. There is a degree of independent methodology but not really of judgment, which is a different dimension. The Minister has to answer the following question: how can there be an official forecast with which the Government then disagree?
Lord Sassoon
Let me start with the easy end of this. Some important points were raised, not least the crucial point raised by the noble Lord, Lord Eatwell. I am very grateful to the noble Lord, Lord Higgins, for trying to save postage—we do look at every bit of possible wastage around government. However, on the point that my noble friend Lady Noakes raised, the construct here is that in Clause 8(2) the OBR is required to lay its reports before Parliament, and that means directly. So it is probably worth the price of a postage stamp or somebody pressing an electronic button, or whatever one does these days, to ensure that, given that this is an independent body, it does not forget to send a courier round to the Treasury as well. That is probably a failsafe that we should have in there.
On the nub of the questions around the linkage of the forecast to the Treasury and the linkage between the forecasts of the OBR and the MPC, the noble Lord, Lord Turnbull, kindly drew our attention to paragraph 3.7 of the charter. That is the critical one. In the first sentence it says:
“The Government intends to adopt the OBR’s fiscal and economic forecasts as the official forecast for the Budget Report”.
That is the Government’s intention, but the charter continues by saying that the Government,
“retains the right to disagree with the OBR's forecasts”.
Lord Eatwell
Will the Minister clarify this for me? Is he saying that while the Government intend to accept the OBR’s forecast, they may actually reject it? Is that what he is saying here?
Lord Eatwell
Just to clarify, the point that I was trying to make was that the charter states that the OBR plays an important role in policy-making by providing forecasts and other estimates. In other words, those forecasts and estimates are part of the toolkit for making policy, but the OBR does not itself make policy decisions. That is what I meant to say.
Lord Sassoon
I am grateful that we have got that clearer. I should move on briefly to the question of whether it would be appropriate to align the forecasts of the OBR with those of the Monetary Policy Committee. Again, I am very much with the analysis of the noble Lord, Lord Turnbull, on this. It is worth mentioning what Robert Chote, the OBR chair, said on this subject. He made it clear during the hearings of the Treasury Select Committee that, as he sees it, the OBR and the Bank of England are independent bodies and each needs to make its own judgments for its own reasons. I completely agree, but he went on to say that he recognised that it would be valuable for the Bank of England and the OBR to have regular exchanges of views about areas of common interest. I expect that the OBR will exchange views with a range of organisations and individuals and, when introducing its document today, the OBR made it clear that in this first document it had met a range of organisations and individuals. In that context, of course, I would expect the OBR regularly to talk to the Bank of England, and each would be very interested in the other’s approach to these matters. However, it is critical that at the end of the day the OBR acts independently of the Monetary Policy Committee, of the Treasury and of all these other fine forecasting bodies.
These are important matters, and I hope that I have clarified the intention of the legislation in these areas. However, I believe, as do the majority of noble Lords who have spoken, that the OBR’s forecasts must ultimately be independent. Therefore, I ask my noble friend to withdraw his amendment.
Finance (No. 2) Bill
Lord Eatwell Excerpts(13 years, 12 months ago)
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Lord Eatwell
My Lords, I am grateful to the noble Lord, Lord Sassoon, for his introduction to the Bill. In the Bill we are told that its purpose is to:
“Grant certain duties … and to amend the law relating to the National Debt and the Public Revenue, and to make further provision in connection with finance”.
I intend to address those broader issues. I hope that, while the noble Viscount, Lord Trenchard, feels the debate has been dull, I might be able to liven things up a little.
I begin by referring to the comments of my noble friend Lord Desai and the noble Lord, Lord Newby. In particular, my noble friend Lord Desai referred to the difficulties in which the Government have now found themselves over their policy of removing child benefit from those families in which one member is a higher-rate taxpayer. My noble friend suggests that child benefit be treated just as a general taxable benefit, and the current structure in which it is simply paid to the woman be changed. I remind him that when the late Barbara Castle introduced child benefit in the 1970s, she was insistent that it should go to the woman for fear that men might, as she said, spend the benefit on drink and gambling.
The Chancellor has said that any woman who lives in a household in which there is a higher rate taxpayer and does not declare the fact will be fined. I suggest a credible scenario to the Minister. Let us suppose that a grandmother, who is a higher rate taxpayer, on the death of her husband moves in with her daughter and young family who are in receipt of child benefit. What will then happen? Will the grandmother be fined if she does not tell her daughter that she is a higher rate taxpayer, or will the family lose its child benefit? This is hardly a family-friendly policy and a number of similar scenarios can be constructed which demonstrate that this change in the law has not been thought through.
The noble Lord, Lord Newby, referred to the changes in the making of tax policy. I have pleasure in following him in welcoming the Government’s changes in tax-making policy. I had the privilege of serving on the sub-committee of your Lordships’ Economic Affairs Committee which examined the Finance Bill. His proposal that its role be extended and that more technical resources be made available to it is a very good one which the Government should take seriously.
As I said just now, I wish to focus my remarks on the wider issues of the national debt. In doing so, I will return to comments made by Mr Bernanke and to the speech of the noble Lord, Lord Ryder. I also want to refer to the overall fiscal stance in the June Budget, of which the measures in this Bill are part of the practical emanation. Two slogans have dominated the presentation of the Budget and of the Government’s policies by the noble Lord and his government colleagues: first, that the budget deficit is, as Mr Cameron has put it on numerous occasions, a burden on our children; and, secondly—the point often made by the noble Lord, Lord Sassoon—that when the Government took office Britain was on the brink of bankruptcy. These two propositions provide the foundation on which the case for the Government’s policies on the national debt and deficit reduction is built, so they are worth examining in detail.
First, let us consider the proposition that the deficit, and the national debt which results, are a burden on our children. While the scale of the nation’s indebtedness is a constant theme of government statements, I cannot remember a single reference by the Government as regards to whom the debt is owed. The answer, as is clear in the data published by the Debt Management Office, is that most of government borrowing is from British lenders, predominantly insurance companies and pension funds but also local authorities and some individuals. In other words, the taxes that are raised to pay the interest on the debt and to repay the premium are raised from British taxpayers predominantly to pay to British taxpayers. The accumulation of debt simply defines a pattern of income redistribution; it does not in and of itself result in a loss of income to Britain as a whole,
What of the fate of our children? If we are placing a burden on our children, the policies pursued today would result in lower GDP per head in the future. But by their own admission, it is the Government’s own policies, not the deficit, that are lowering the growth rate of the British economy; and hence lowering future GDP per head. That is the real increase in the burden placed on our children by this Government as compared with the budget reduction plans advanced by my right honourable friend Alistair Darling. Had the Government stuck to Labour’s plans, our children would enjoy a higher income per head in the future. The loss of GDP growth that is the consequence of coalition policy is the clear and present cost of this Government. Indeed, it is the Government’s lack of any growth strategy that is most disturbing. Will the Minister confirm the story in the Financial Times this morning, which stated that the expected White Paper on growth has been,
“quietly dropped after George Osborne, the chancellor, decided he needed more time to draw up a coherent strategy”?
The report continues:
“The much-awaited growth white paper, which was originally scheduled for publication last month, has been downgraded to little more than a discussion document. Aides admitted the government did not have enough serious content to warrant a white paper”.
No serious content and no coherent strategy—that sums up the Government’s approach to growth in Britain.
There is one sense in which the deficit could be a burden on our children, and that is of the taxation necessary to pay interest or reduce the debt were to reduce the GDP’s rate of growth. No argument to that effect has been advanced by this Government. Let us follow that up. Taken to extremes, it is obvious that taxation can inhibit growth. If taxes were 100 per cent of income, then nobody would be prepared to work or invest, even if those taxes were subsequently redistributed as interest payments. So has the deficit threatened to push taxes so high that growth prospects are damaged? Among the G7 economies, the US, Canada and Japan have lower shares of taxation in GDP than us, but Germany, France and Italy all have higher tax rates, and all the Scandinavian countries have tax rates that are higher than the UK deficit—they could pay it off in one year, yet they still sustain respectable rates of growth.
Of course, the transfer payments demanded by a budget deficit can be an unwanted restraint on other government spending policies. However, the core issue here is balance—which mixture of spending and taxation will secure the best long-term growth of GDP per head for our children? The Government’s slogan-driven policy does not just get the balance wrong, it does not even recognise that there is a balance to be struck.
What of the other pillar of Government sloganeering —the claim that the UK was on the “brink of bankruptcy”. The noble Lord has used this expression so many times that he must be able to tell your Lordships exactly what he means by it. Does he mean that the UK was about to run out of cash, as the Greek Government were? If so, how does he account for the ready supply of cash dispensed in the Bank of England’s programme of quantitative easing? Does he mean that the UK had difficulty funding its bond sales? If so, he should look at the Debt Management Office data which show that not a single gilts auction this year has been less than 40 per cent oversubscribed, and many were 100 per cent oversubscribed. Or is he referring to speculation about Britain being downgraded by the ratings agencies from its triple-A status? Would these ratings agencies to which the Government pay so much attention be the same clowns who told us that securitised subprime mortgages were as safe as Uncle Sam? Given their track record, are these agencies the sort of people who the Government listen to when shaping the economic future of the British people?
Before the Minister replies on the issue of being on the brink of bankruptcy—and I am sure he will reply in detail since that is a favourite expression of his—would he care to reflect on the words of Ms Rachel Lomax, who was, until recently, Deputy Governor of the Bank of England? Speaking in the City just a couple of weeks ago she said that the
“crisis conjured up by George Osborne”
was a “straw man”—a misrepresentation of the true position. She added,
“It's just not true. We weren't on the brink of bankruptcy”.
None of what I have said should be taken in any way to suggest that somehow deficits do not matter. I am arguing that they are simply part of the balance by which the Government seek to secure the best possible performance of the economy. An important part of that balance—
Lord Barnett
I have a Question next Monday on this specific point about bankruptcy, on which I hope we will all have an opportunity to comment. Is my noble friend aware of what the Conservative chairman of the Treasury Select Committee said regarding the exaggerated nonsense—a massive exaggeration—about bankruptcy? In a massive understatement of the real situation he defined it as being “slightly over the top”.
Lord Eatwell
“A massive exaggeration” is a rather balanced statement from a Conservative Member of Parliament, and is balanced nicely by Ms Lomax’s statement, “It’s just not true”.
An important part of seeking balance in the economy is to avoid the slogan-driven hysteria that has characterised economic policy-making under this Government. It is not just that basing policy on slogans can lead to seriously unbalanced policies, but that slogans themselves can seriously damage economic performance. Words used by government Ministers to describe the economy include “shattered”, “busted”, and, of course, “on the brink of bankruptcy”. They have done this over and over again, which can lead to a serious loss of confidence in fragile international financial markets. There is increasing evidence that business and investor confidence has fallen, damaging investment prospects in Britain. Has the noble Lord noticed the conclusions of the latest monitor of UK business confidence for the fourth quarter of 2010, published by the Institute of Chartered Accountants in England and Wales? It states:
“The decline in the Confidence Index has accelerated this quarter, partly reflecting ongoing uncertainty about the path of the UK economy over the coming years ... Business leaders are becoming less sure about the UK's economic prospects for 2011 and beyond”.
That is the impact of this Government's slogan-driven policies.
We on this side of the House have argued for an economic policy based on a balanced appraisal of the relative contributions of fiscal policy and growth in restoring public finances after the ravages of the recession. We support the position taken by the head of the Federal Reserve System, Mr Ben Bernanke, to whom the noble Lord, Lord Ryder, referred. Commenting last Friday on the destructive grip of austerity policies, Mr Bernanke called for,
“a fiscal programme that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits”.
Those words describe the economic measures put in place by Alistair Darling. They were a measured and considered response to our current economic woes and the very antithesis of the Government's slogan-driven hysteria.
Lord Sassoon
For the time being, I refer the noble Lord to the first edition of the Oxford English Dictionary, volume 1, part 2, under “B”, which was printed some time in 1888. That is quite a good starting point. We shall return to that in answer to his Question in a few days’ time.
Lord Eatwell
We are having some fun, but this really is a very serious matter indeed. The Minister has used this expression time and time again as one of the key factors that justifies the economic stance taken by Her Majesty's Government. Is he saying that he cannot stand at the Dispatch Box right now and tell us what it means?
Lord Sassoon
My Lords, as I said, a Question has been tabled and I shall answer it then. I have already referred the House to the two meanings in the Oxford English Dictionary first edition of 1888, which I think explains it very well. We had a reference to PIMCO earlier in the debate from my noble friend Lord Ryder of Wensum. I refer the noble Lord to the comments of the founder of PIMCO a few months before the election when he talked about the toxic pile. He may or may not have been front-running a position, but when the largest bondholder in the world talks about UK debt in toxic terms, the point is well understood. The critical question that arises from all of this—
Lord Eatwell
On child benefit, I did not argue that it was not inappropriate for the burdens of deficit reduction to be widely shared; I argued that the Government’s policy will not work. It has not been thought through. It is incompatible with the structure of child benefit as it is paid today. Perhaps the Minister would like to take my example of a top-rate-paying taxpayer who, on the death of her husband, moves in with a daughter who is receiving child benefit. Is that grandmother going to be fined by the Chancellor or will her daughter lose her child benefit? I do not think that is very family friendly. Do you?
Lord Sassoon
I have explained the general and difficult principles within which we have had to operate. My right honourable friend has had to make difficult decisions on child benefit. The case study put forward by the noble Lord, Lord Eatwell, reminds me of the sort of things that were presented in a tax exam when I was struggling through my accountancy qualification. Of course there are complicated cases but, as I have explained, in the implementation of child benefit it has been important to avoid a complex system or one that required a fundamental rewrite of the existing PAYE and self-assessment systems.
I come back to the fundamental point underlying all this which is that growth prospects remain on track and, in answer to a related question from the noble Lord, Lord Desai, borrowing remains on track. I will give an update in parallel with the autumn forecast next week, in the normal course. However, in terms of the funding to date, the programme is ahead of the pro-rata schedule, so the Debt Management Office has raised £127.4 billion to date, which accounts for 77.2 per cent of the remit that it was given at the time of the Budget. That is slightly ahead of the pro-rata run rate. The DMO has carried out that mandate on very fine terms. If the remit needs to be changed in any way, that will come next week, in the normal course.
I thought there might be some points to address to my noble friend Lord Ryder of Wensum, but his advice was addressed to the Monetary Policy Committee. I listened with interest to what he had to say and note that in some of the things he has said in this area in the past he has proved prescient. I am sure that the Monetary Policy Committee is listening to his thoughts.
I turn to tax policy making. I was grateful to the noble Lord, Lord Eatwell, for welcoming the steps we have taken and to my noble friend Lord Newby. In answer to their questions, the Government welcome the contribution of the Economic Affairs Committee. If the new timetable gives the Select Committee time to look at the draft legislation, as it should, we would welcome any comments that it has on it. That will add the greater scrutiny and transparency that we wish to see. I take my noble friend’s point about fuller Explanatory Notes and will look to see whether there is any more that we can do on that.
On the question about whether it was right in around 2003 or 2004 to move responsibility for tax policy making wholly into the Treasury, from what I observe of how that operated then and now, there have been considerable gains from the physical collocation of a large part of HMRC’s headquarters and the Treasury. I certainly observe that HM Treasury’s tax policy making is absolutely informed, as it must be, by what HMRC brings to the table, even if the formal responsibility is not what it was originally.
On one final point, my noble friend Lord Trenchard talked about the number of European-related clauses. To get the record straight, in another place, the litany of such clauses was slightly erroneous because, on my list, Clause 14 on film tax relief has no European link, whereas Clause 4 on seafarers’ earnings has a European link. The list is a series of technical adjustments, whether it is the important question of the length of cigarettes to reflect an EU directive aiming at counteravoidance or technical adjustments related to VAT directives. These things are relatively technical and it is important to make sure that we align the details of our regime with what is changing in Europe.
I am afraid that I may have disappointed my noble friend Lord Newby, who commended me charitably for my brief opening, but I will not detain noble Lords any longer other than to say that we have had an interesting debate today. We have not talked in any detail about the clauses of the Bill, which I take to mean that the Bill—in the way that it removes some of the discrepancies that plague our tax system—is welcomed on all sides of the House. I commend this Bill to the House.
Ireland: Financial Assistance
Lord Eatwell Excerpts(13 years, 12 months ago)
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Lord Eatwell
My Lords, I am most grateful to the Minister for repeating the Statement made by the Chancellor of the Exchequer in another place. I welcome the Statement on the provision of financial assistance to the Republic of Ireland. It should be clear to all noble Lords that this is in the best interest of the British economy. After all, not only is Ireland one of the UK’s most important trading partners, more important, as the Statement acknowledged, than Russia, India, China and Brazil put together, but British financial institutions have substantial exposure to Ireland. Can the Minister confirm that the exposure of UK institutions to Irish banks exceeds £50 billion and that the overall exposure of the UK to Ireland exceeds £100 billion? In these circumstances, providing support is a price well worth paying to assist in the economic recovery of our neighbours and friends and at the same time to secure the position of our own financial institutions.
The story of the financial pressures brought to bear on Ireland in the past few weeks should be a salutary lesson to Her Majesty’s Government—the lesson that careless talk costs confidence, and loss of confidence spells economic disaster. As is now well known, careless talk by Chancellor Merkel, suggesting that extra costs should be borne by bondholders, was the last straw that broke confidence in the Irish markets. However, this was against the background of continuous deficit hysteria, promoted not just by the traditional deficit hawks in Germany but also by Her Majesty’s Government. Instead of promoting deflation, will Her Majesty’s Government learn from the Irish experience and, as well as developing a sound growth strategy at home, promote growth strategies abroad?
There is some confusion in the Statement as to which part of the UK’s assistance is a contingent liability—that is, a guarantee only to be drawn in the event of default—and which part is to be up-front money. Will the bilateral loan that is contemplated be a contingent provision or an up-front loan? Once the funding is agreed, how and when will the provision appear in the Government’s accounts? Will this unexpected expenditure alter the Government’s declared objective of reducing the deficit to zero in four years? What measures are being taken to recapitalise the Irish banks—key measures such as those that were instituted by Mr Darling so successfully for Britain’s banks?
The big question that arises directly from this Statement is: if the Government can afford to commit substantial funds to the Irish recovery, why cannot extra funds be found to promote the recovery of British industry? A national investment fund of equivalent size would transform the financial circumstances of Britain’s entrepreneurs. It would be a timely boost to confidence and would ease the financial logjam that is holding Britain back. If there is money for Ireland, why is there not money for Britain?
Finally, is the noble Lord aware that if Britain were on the brink of bankruptcy, the Government would not be making the Statement we have heard today?
Health: Private Medical Insurance
Lord Eatwell Excerpts(14 years ago)
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Lord Sassoon
I thank my noble friend for raising that point. Of course I am happy to convey to the FSA the points that have been raised this afternoon.
Lord Eatwell
My Lords, the noble Lord has taken a remarkably complacent view in his answers about the position of policyholders. Surely the FSA’s responsibility to ensure that financial institutions treat their customers fairly requires that this matter be investigated and that better information be given to policyholders about the limitations of their cover.
Lord Sassoon
My Lords, I think I have responded to the noble Lord’s points in the answers that I have given to a number of questions.
Budget Responsibility and National Audit Bill [HL]
Lord Eatwell Excerpts(14 years ago)
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Lord Eatwell
My Lords, I am most grateful to the Minister for his introduction to the Bill. I shall begin by referring to the second part of the Bill, which deals with the revised arrangements for the re-establishment of the NAO and its relationship with the Comptroller and Auditor-General. I am assured by the Treasury Bill team that, apart from minor drafting changes, this is the same Bill as that introduced by the last Government and lost at the end of the last Parliament. I can therefore begin this afternoon by congratulating the Government on having recognised the wisdom of the Labour Government’s proposals. I may have some small amendments to propose later, when I have had the opportunity to examine the Bill in more detail, but for the moment, with that part of the Bill, I am content.
I turn to the real novelty before us: the proposed legislation to establish an independent OBR. We on these Benches regard the idea of an independent Office for Budget Responsibility as a very good idea—perhaps the only good idea that the Government have had so far. We are therefore totally committed to ensuring that the legislation establishing the office is robust and fit for the purpose of establishing an independent office that will become an enduring and credible part of this country’s policy-making apparatus. To that end we apply the following tests to the legislation: first, independence; secondly, credibility; and thirdly robustness—that is, are the structures in place sufficient to maintain independence and credibility among the political storms that will invariably assail the office from time to time?
First, on independence, the comparison of the legislation establishing the OBR with that re-establishing the National Audit Office, conveniently contained within the same Bill, reveals that the OBR’s independence is a pale shadow of the independence of the NAO; and, correspondingly, that the independence of the chair of the OBR is a pale shadow of the independence of the Comptroller and Auditor-General. For example, Clause 17(1) makes it clear that the Comptroller and Auditor-General,
“has complete discretion in the carrying out of the functions of that office”.
Clause 6(3), by contrast, requires that the OBR must,
“in the performance of its duty … act consistently with any guidance … in the Charter”,
as described in Clause 1 of the Bill—which, by the way, incorporates Clause 1(6), stating that that guidance may be modified at any time. Let us remember that this guidance is guidance by the employer, since all OBR funding comes from the Treasury. It is not casual suggestions by a disinterested party. So the guidance of the charter is fundamental to the status of the OBR. It qualifies virtually all the supposed freedom and independence of the organisation. So, when will the charter be available for scrutiny by your Lordships' House?
In the absence of the charter, let us examine Clause 1 more carefully. In Clause 1 we read that the charter will outline,
“the formulation and implementation of fiscal policy and policy for the management of the National Debt”.
Notable by its absence from the charter is any reference to the economic health of the nation—the level of unemployment, for example. It therefore fails to provide transparent guidance to the OBR concerning the performance of its duties, as set out in Clause 4, to provide fiscal and economic forecasts. Will the Minister tell the House whether the catch-all clause, Clause 1(3), which states:
“The Charter may contain … other material as the Treasury considers appropriate”,
will contain guidance as to the economic variables to be included, or, perhaps even more important, those variables to be excluded from the activities of the OBR?
More broadly, Clause 1 makes it clear that the guidance of the charter will ensure that all activities of the OBR will be those that “the Treasury considers appropriate”, save one. At only one point in this whole Bill are independent powers provided to the OBR—that is, in Clause 6(2), which states that,
“the Charter must not make any provision about the methods by which the Office is to make any such forecast, assessment or analysis”.
That is it; that is the only independent bit. I do not want to suggest that that method of forecasting is unimportant—of course it is important, and I shall return to it in a moment—but I am certain that the phrase “an independent Office for Budget Responsibility” might be expected, in the understanding of ordinary people, to mean much more than that. However, the OBR does not have freedom over what it is to study. It does not even have the freedom apparently suggested by Clause 5(2), which was quoted by the Minister and states:
“The Office must perform that duty objectively, transparently and impartially”.
You would think that that was clear. However, that clause is qualified by Clause 6(1)(b), which mandates the provision of guidance as to what subsections (2) and (3) of Clause 5 entail. So the Treasury has to provide guidance on what transparency entails, and even what impartiality means. That does not sound very independent to me. If I have misinterpreted these clauses, may I suggest that the Government amend them to place their interpretation beyond all reasonable doubt?
One element of the guidance that we on this side agree with is that in Clause 5(3), which seems to confine the activities of the OBR to consideration of the impact of government policies alone. I am sure it is right that the OBR should not become embroiled in political controversy. However, will the Minister confirm that I have interpreted the clause correctly, because the clause qualifies the scope of the office’s consideration by the words:
“Where any Government policies are relevant … the Office may not consider what the effect of any alternative policies would be”?
I quite see that this may allow work on methodological issues or research into econometric technique, but what about circumstances in which the Government have no policy and hence the qualification no longer applies? Suppose, for example, that the Opposition put forward proposals to reduce the level of unemployment by means of schemes to be funded by the European Union. Could the OBR test these against a base-case scenario, as is the approach of the Congressional Budget Office in the United States? Or would it be prevented from doing so by Clause 5(3)? It is not at all clear. If the role of the OBR is to test government policies alone, why not say so explicitly?
Finally, on independence, paragraph 1(c) of Schedule 1 allows for the appointment of no fewer than two members of the office, who are not required to have,
“knowledge or experience likely to be relevant to the performance of the Office’s duty under Section 4”.
I suppose we should refer to these as non-executives. Schedule 2, on the other hand, establishes a National Audit Office with a majority of non-executives and a non-executive chairman. The NAO’s non-execs are appointed by the Public Accounts Committee and the OBR’s non-execs are appointed by the Chancellor of the Exchequer, so independence is eroded again. Moreover, the NAO’s non-execs have a clear responsibility, as set out in paragraph 10(2) of Schedule 2, to sustain the complete discretion of the Comptroller and Auditor-General. But a peculiarity of the OBR legislation is that it fails to place any responsibility on these non-execs, other than participating in the preparation of the annual report and in the audit. Since paragraph 12(3) of Schedule 1 explicitly excludes them from any role in the preparation of forecasts, what are these non-execs supposed to do? Make the tea? They certainly do not have the power to protect the independence of the OBR such as it is. Surely that should be the non-executives’ main role. The conclusion must be that this Bill neither establishes the independence of the OBR nor embodies procedures to protect the independence, save in one respect—the forecasting methods used by the committee.
Let us now turn to our second criterion, that of credibility. If the OBR were to be truly independent, as we on this side would wish, then it is inevitable that it will become a powerful brand. The access of the office to detailed government information, as described by the Minister, would make its reports the defining landmarks for those interested in economic and fiscal affairs—a very worthwhile achievement. As noble Lords may be aware, economic forecasting is a controversial discipline—an art not a science. Even widely used techniques do not command universal agreement or even respect. Forecasting models inevitably embody contentious theoretical assumptions, and econometric techniques are matters of often heated debate. It is therefore enormously important for the credibility of the OBR that its methods are subject to rigorous peer review and challenge.
The first component of this will be transparency. As already noted, the requirement of transparency is qualified by the provision of guidance as to what transparency actually means. However, some of my fears would be allayed if the Minister would guarantee that the data, methods and costings used in the preparation of forecasts will all be published simultaneously with those forecasts in readily accessible electronic form. This is necessary if there is to be informed review and challenge of the OBR's methods.
There should also be provision in the Bill for a peer review committee such as that provided in the structure of the US Congressional Budget Office. The peer review committee should be appointed by an independent person—perhaps the president of the Royal Economic Society—subject to the approval of the Treasury Committee in another place.
I turn finally to our third criterion: robustness. If the Bill were to establish a truly independent and credible OBR, future Governments would meddle with it at their peril. This is not a matter of the people involved. I have full confidence in the personal integrity and independence of Mr Robert Chote. I declare an interest as he is an active member of the Cambridge college of which I am master. However, the robustness of the OBR should not rest on personalities. That is why the severe limitations placed by the Bill on the OBR's independence, and the lack of any support for the credibility of its methods, indicate that the drafting fails the robustness test. Therefore the Bill fails all three of our tests. The OBR is not meaningfully independent, save in the methods that it uses—and those methods are not buttressed by the credibility of peer review. Failing those two tests, it is not robust.
I am prepared to accept that this outcome was not the Government's intention, and that the problems that I have identified are errors of drafting. If that is the case, I assure the Minister that I will be more than willing to work with him to produce a Bill that will establish an independent, credible and robust OBR. Of course, much of that work will be facilitated by sight of the proposed framework agreement between the Treasury and the OBR. Will the Minister confirm that such an agreement is being drafted, and will he tell me when I may have sight of it?
This part of the Bill is a failure. It need not be. I have a proposal to put to the noble Lord on behalf of my right honourable friend Alan Johnson, the shadow Chancellor. I propose that, at the end of Second Reading, the noble Lord, on behalf of the Government, should formally withdraw Clauses 1 to 10 of the Bill, and Schedule 1—that is, all material relating to the OBR. The Bill will then become the National Audit Bill, and will, I believe, receive support from all sides of both Houses. An all-party pre-legislative committee of both Houses should then be formed—or such all-party structure as the Government wish—to thrash out an independent, credible and robust structure for the Office for Budget Responsibility. This would be a major step toward increasing democratic accountability and transparency in our country. I hope that the Government will accept my right honourable friend's proposal.
Lord Newby
My Lords, I, too, welcome the Bill. When the proposal first came forward for the Office for Budget Responsibility, I regarded it as a gimmick. However, a number of things since then have persuaded me that I was wrong. First, when we discussed the statistics Bill several years ago, we discovered that only 17 per cent of the population believe any government statistics. Whether that is a rational view is irrelevant; the way in which politicians down the years manipulated official statistics left them with no credibility whatever. Therefore, a number of things needed to be done. Fortunately, the new structure of the Office for National Statistics is improving that figure, but it was a salutary reminder that, whereas we may take statistics seriously, politicians and Ministers have fallen so low in public regard that we are atypical.
Secondly, it became clear, not least from reading the book of the noble Lord, Lord Mandelson, that the previous Prime Minister and Chancellor believed that growth figures were a matter for political manipulation. It is absolutely clear that that is what Gordon Brown sought to do. This gives me another reason to believe that we have to take that power and oversight away from the Treasury. During Gordon Brown’s chancellorship, we had the delightful business of the golden rule and the way in which it was stretched, expanded and diminished to fit the requirements of the Chancellor. It is fascinating to hear the huge support of the noble Lord, Lord Eatwell, for these principles of independence. He shows all the zealotry of a convert. Certainly, while his party was in government, nothing was done to promote the principles that lie behind those parts of the Bill. That does not necessarily mean that his criticisms—
Lord Eatwell
My Lords, would the noble Lord like to make it clear that the independent structure of the Office for National Statistics was implemented by the Labour Government?
Lord Newby
My Lords, the structure was implemented by the Labour Government but, if it had not been for this House, the body would have been emasculated. The current structure is miles away from the feeble structure that came before your Lordships’ House. It required a cross-party coalition of former senior civil servants and Members from other parties to change virtually every aspect of that Bill, so that when it left your Lordships’ House it was almost unrecognisable. That is why the noble Lord is right to want to subject this Bill to careful scrutiny about whether it will achieve the aims that have been set for it.
Three areas deserve the scrutiny that the noble Lord has set out. It is important that the structure, the people and the role are right. First, the structure is slightly odd in some respects. The role of the chair and the way in which that person is appointed by a transparent appointment procedure obviously make sense. The other two members of the office are being scrutinised by the Treasury Select Committee and clearly must have relevant experience. Their roles are relatively clear, although it is not clear to me whether the Government envisage that these will be full-time or part-time roles. I find the context of the other non-executive directors strange in relation to this body and I am not sure what their role will be. I was slightly surprised by the use of the phrase “at least two”. If the chair decided that he would like half a dozen, would that be acceptable? More important, what role will they play? They will not be technical people, but much of the work of the office will be intensely technical. Will their role be to protect the independence of the office in some way and to proselytise about the role of the office? It would be helpful to have further clarification from the Minister on that.
Secondly, three positive aspects of the way in which the top people will be appointed will be crucial to the success of the body. First, they will be in place for five years, which is a long time. Secondly, unlike for members of the MPC, for example, the recruitment process will be open. It will not be a matter of the Chancellor ringing up someone on a Sunday evening and saying, “I’d like you to take this job and, by the way, I need to know by Monday morning”. Thirdly, the role of the Treasury Select Committee is important as regards the quality of the people involved. The Government have made a good start by their appointment of Robert Chote as the first chair of this body.
The third area where the noble Lord, Lord Eatwell, has demonstrated that there is room for further discussion is the remit and how it will work. I do not think that the word “independent” appears in the Bill, which is slightly surprising. There is some ambiguity about where the independence of the body starts and stops. We know from many other areas of public life that, if you give the Treasury an inch, its inclination is to take a mile. I look forward to discussions in Committee, where, I hope, we can clarify that slightly.
I do not think that the Government would be sensible to take up the generous offer of the noble Lord, Lord Eatwell, of a hugely long period of scrutiny on this. This body is of great significance and there has been a lot of public debate on it already. We have the opportunity in your Lordships’ House to debate all these technical issues carefully, as we always do, and so will those in another place. We need to get the formal infrastructure on to the statute book now, without further considerable delay. With those caveats, I am looking forward to the Committee stage and I support the Bill.
Lord Sassoon
My Lords, I have made it completely clear that there is no question of my making any criticism of officials. I am making criticisms of the previous structure in which Ministers were able—whether from wishful thinking or, as I say, from more sinister motives—to decide on the forecasts. That is why we need an independent body. I am conscious of the game that is played here—that I have to sit down after about 18 or 20 minutes. I will do my best to answer as many of the points as I can but if noble Lords want to interject, of course I will listen to them but I may not get through as much as I otherwise would and will have to write to noble Lords afterwards.
In answer to the question from my noble friend Lord Higgins and others about the desirability of having a draft of the charter for the House to see—absolutely, that is what I intend should happen. We are working to that end. Related to that in terms of what happens next, the OBR will publish forecasts before the end of the month which will bring its forecasts up to date to reflect the decisions announced in the comprehensive spending review.
As we think that this is the challenge that has been set, the Bill absolutely takes away the responsibility for determining the forecast from Ministers and gives it to independent experts. It needs to be a new independent body, rather than a case of just asking one of the fine existing forecasting houses. At the critical times of the year when the forecasts need to be produced, particularly at the time of the Budget, it is essential—as has been explained in different ways by the noble Lords, Lord Turnbull and Lord Burns—to have a close relationship. We need to have an independent body of the sort that we have designed, rather than just taking consensus forecasts after the event. I think that the House would be rightly outraged if we did not at the time of the Budget immediately have forecasts available.
Ministers will retain the responsibility for making policy and for the OBR to shine a light on the state of the public finances resulting from those policy decisions. I can therefore confirm that it is the intention that the OBR should remain outside politics and should not, for example, be asked to cost alternative policies, wherever they come from, including from opposition parties.
We have heard a wide range of questions about the design of the OBR. On independence, without dwelling on it, I do not think that the comparisons in any way with the NAO are right. These bodies have very different objectives and come from very different starting points. In answer to other points, the fact that they are put in the Bill together is a result of the fact that the NAO provisions are sufficiently important that we should bring them forward at the earliest possible date. As noble Lords will understand, legislative time is hard to come by. So, in terms of the trade-off between two Bills and finding a slot to bring forward important provisions of the NAO, we have taken the decision to put the two sets of provisions in the same Bill. However, that does not mean to imply in any way that we believe that there is a comparison to be made between the provisions for the two very different bodies.
I take to heart the words of the noble Lord, Lord Burns, who said that complete separation would not be appropriate and pointed to the quality of the people as being particularly critical to the way in which independence works. The OBR’s independence will be judged on the quality of its analysis and on the ongoing scrutiny by the public and by Parliament. Our provisions have been informed by the NAO report published on 22 June which examined the forecast prepared by the interim Office for Budget Responsibility for the emergency Budget. It set out a number of indicators of independence which have informed the design of the Bill. These are set out in Clause 5(1), which talks about “complete discretion”; Clause 6(2), which talks about independence and the method of analysis; Clause 9, which talks about the “right of access” and assistance to “Government information”; and paragraph 8 of Schedule 1, which talks about staff being appointed by the OBR. The latter point was made a number of times. There are other matters not strictly in the Bill—“physical location”, for example, which has already been addressed by the OBR, and questions of funding, which can be raised directly with the Treasury Select Committee.
It was asked whether it could be argued that the OBR is independent when it is clearly working for the Government in its remit. I would describe the words “complete discretion” as the critical key here, and refer to the Bill preventing the Treasury from specifying the methods of the OBR’s analysis.
There was then a question about why the word “independence” did not appear in the Bill. Not only does the term “complete discretion” encapsulate what is intended by independence in this case but the same wording is used to empower the Comptroller and Auditor-General and the NAO, and nobody questions their independence.
Lord Eatwell
My Lords, before the noble Lord leaves the issue of independence, I wonder whether he can help me. Clause 5(2) states very clearly:
“The Office must perform that duty objectively, transparently and impartially”.
Everyone must applaud that wording. But then Clause 6(1) states clearly:
“The Charter for Budget Responsibility may include guidance to the Office about how it should perform its duty under section 4, including (in particular) guidance about … what subsections (2) and (3) of section 5 entail”.
So, is there to be guidance about what impartiality entails?
Lord Sassoon
My Lords, rather than discuss the primacy of the wording in Clause 5(2) in the abstract, it will be easier to return to these matters when we see the draft wording. I can, however, assure the noble Lord that the words in Clause 5(2), to which he rightly draws attention, are the keystone here.
Lord Sassoon
My Lords, I am conscious of the time and of the conventions of this House. I have explained at some length—but clearly not with sufficient clarity for the noble Lord, Lord Myners—that guidance will be given. That does not override in any way or compromise the three critical tests set out in Clause 5. I do not for one minute think that it should be necessary to get into questions of interpretation in the courts or anywhere else.
Lord Eatwell
At the end of my speech I made a formal offer of co-operation on behalf of the Official Opposition. I would be grateful if the Minister would respond to that offer.
Lord Sassoon
My Lords, in my next sentence I was about to say that I will of course respond to the challenge from the noble Lord, Lord Eatwell, which was repeated by the noble Lord, Lord Tunnicliffe. I am sorry to disappoint the noble Lord, Lord Eatwell, if he thought that I was building up to a grand conclusion where I would propose to withdraw the clauses in Part 1.
We have had an interesting debate. I will reflect on a number of points and I have endeavoured to answer as many as possible. Nevertheless, the tone of the debate from the majority of speakers this afternoon confirms to me that we are absolutely on the right track, generally, and that we should press ahead. There has already been considerable scrutiny of and discussion about the OBR over the past few months. I look forward to the continued scrutiny by noble Lords as the Bill wends its way through subsequent stages, and I ask the House to give the Bill a Second Reading.
Bill read a second time and committed to a Grand Committee.
Banking: Bonuses
Lord Eatwell Excerpts(14 years ago)
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Lord Sassoon
My Lords, I have said that we have already taken action and are continuing to consider other possible actions in this area.
Lord Eatwell
My Lords, I was intrigued by the Minister’s identification of remuneration with risk taking. Are not bonuses usually paid to bankers for taking risks with other people’s money?
Lord Sassoon
My Lords, that is precisely why we want to make sure that there is a better alignment between the way that remuneration is paid and the mitigation of risk that should be there. It is precisely to get a better alignment with the risks that are incurred that we are supporting the measures that are being taken globally—limiting the amount of bonus taken up front in cash and deferring a significant proportion of bonuses in line with the proposals of the G20.
Comprehensive Spending Review
Lord Eatwell Excerpts(14 years ago)
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Lord Eatwell
My Lords, this has been a remarkable debate. There have been some very fine speeches, mostly from these Benches, but also from the Benches opposite. We heard three remarkable maiden speeches from the noble Lord, Lord Allan of Hallam, my noble friend Lady Healy of Primrose Hill and my dear and noble friend Lady Nye.
Two questions have been central to the whole debate. The first is whether this policy is necessary and the second is whether it will work. Is it necessary? That depends on an assessment of the economic state of the nation and, in particular, the Government’s inheritance from the previous Labour Government. Let us reflect on that inheritance for a moment. In 2007, before the recession struck, the economy was growing steadily at a little under 2.5 per cent a year and maintaining the continuing steady growth that characterised Labour’s decade in office. Interest rates were lower than in the US and the cyclically adjusted fiscal deficit—as chart C6 of the Government’s Budget Report shows—was less than a quarter of 1 per cent of GDP. Crucially, the ratio of public debt to GDP was, at 36 per cent, the lowest in the G7 and well below the 42 per cent that Labour had inherited from the previous Conservative Government. This was a time, as many noble Lords have reminded the Minister, when the main plank of the Conservative Party’s economic policy was a commitment to match Labour’s spending plans.
In response to the recession, the Labour Government acted decisively, devising the much copied model for rescuing the banks, cutting taxes and accelerating expenditure, particularly on construction. There were two main results. First, in the very depths of the recession, which, given the size of our financial services industry, hit Britain particularly badly, unemployment was the lowest in the G7 countries other than Japan. Secondly, as a result of the anti-recession policies, the deficit grew rapidly, faster than in any other country, although, because we started from such a strong point, even today it is still the lowest of the large G7 economies.
The strength of the British economy going into the recession meant that even in the face of a severe fall in tax revenues the Labour Government could afford to stabilise the financial sector to save jobs and to save businesses. When the Minister sums up, perhaps he will say what he would have done differently. Would he have spent less and taxed more? How much deeper would he have wanted the recession to be?
In his Budget of March this year, my right honourable friend Alistair Darling put in place a plan for growth and deficit reduction. The OBR Pre-Budget Report states that,
“cyclically adjusted borrowing falls from 8.8 per cent of GDP in 2009-10 to 2.8 per cent in 2014-15”,
and in that fiscal year public sector debt reaches 74.4 per cent of GDP—still lower than any other major G7 country today.
The noble Lord, Lord Sassoon—he was echoed by the noble Lord, Lord Newby—is fond of telling your Lordships’ House that Labour has no recovery plan, yet in the CSR Statement Mr Osborne cited the impact of Labour’s plans and even costed them. He said:
“I have examined this proposal carefully and I have consulted the published documents of my predecessor”.—[Official Report, Commons, 26/10/10; col. 965.]
Was the Chancellor making it up? No, he was not. It is the noble Lord who has been making up this fairy tale.
What has happened as a result of my right honourable friend’s March Budget? Everything has turned out better than expected. Debt is lower than predicted and growth is higher. This Government’s inheritance was an economy on the path to recovery. This year to date, as a result of Labour policies, the economy is growing at an annual rate of 3.25 per cent and is set to beat the target of halving the deficit in four years.
What was the new Government’s balanced assessment of their inheritance? The new Ministers declared Britain “bankrupt” and “shattered”—that was a Liberal Democrat, by the way—and even, as a Tory Treasury Minister said, a “basket case”. This hysterical nonsense became the considered foundation of economic policy. The party opposite seems to have entered the most dangerous realm of all—they believe their own propaganda. The hysteria has produced the policy before us today. At its core is the attempt to eliminate the deficit in four years, even at the immediate cost of lower growth and higher unemployment—hence 25 per cent cuts in total expenditure, heavily weighted towards cuts in welfare. Yet by 2014, the Budget Report states that there is a 50 per cent chance that growth will be at the level that Labour’s plans would have achieved. How is that possible with the size of these cuts?
The predicted performance, the very core of the Government’s policy, depends crucially on a fast and sustained recovery by the private sector to fill the gap left by the fall in public sector spending, and not of course on growth in private consumption; that is cut by higher taxes and unemployment. Instead, private sector investment and house building are forecast to contribute more to the growth of the economy than they did even in the good times before the recession.
Will it work? A little history may help us. As we all know, Tories love cutting the public sector. That is what they came into politics to do and that is what the noble and learned Lord, Lord Howe, did in his Budget of 1981, as the noble Lord, Lord Stewartby, reminded us. As he also reminded us, in response, 364 economists issued a statement that,
“present policies will deepen the depression”—
and—
“erode the industrial base of our economy”.
That statement has been much derided because, as we all know, the economy grew after 1981. However, what is not noticed is that “present policies” were not continued; they were radically altered. The next five years witnessed the most dramatic change in monetary policy since the war, resulting in an extraordinary explosion of consumer borrowing. Consumer demand filled the gap left by government cuts.
Can history repeat itself? It cannot in the liberalisation of credit—that has been done; nor in lower interest rates—they cannot go any lower; nor, of course, in growing consumer demand. As my noble friend Lord Myners pointed out, there is only one monetary policy weapon left: quantitative easing. I have severe reservations about the strategy of maintaining demand by quantitative easing. It may keep interest rates down at the short end, but the lack of long-term bonds is seriously increasing the riskiness of insurance companies and pension funds. It may mean that there is more cash in corporate hands, but will they spend it on investment when expectations of growing demand are so depressed? Is quantitative easing simply pushing on a string? In truth, no one knows.
The other leg of the Government’s policy is their claim to have increased confidence. Confidence in the commitment to cuts, yes; confidence in the loss of jobs, yes. I know that the noble Lord is fond of fairytales but will the confidence fairy really wave her magic wand over a growing Britain? In truth, no one knows. That is why this policy is a huge gamble. For the sake of Britain we pray that it works, but there must be a high probability that it will not; as Mr Osborne says, there is no plan B.
We have the answers to our questions. Is the misery and destruction of this policy necessary? No, it is not; Labour had set Britain on a growth path to recovery. Will it work? No one knows, least of all the party opposite. What we do know is that vital political and economic debate in this country is debased by the Government’s hysterical fantasies of bankruptcy and financial collapse and by their failure to recognise the strength of the policies put in place by Alistair Darling. Labour dealt with the recession and laid the foundations for recovery. It is the responsibility of this Government not to squander that inheritance.