Budget Responsibility and National Audit Bill [HL]

Lord Peston Excerpts

Monday 6th December 2010 Grand Committee

[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 Myners]

My Lords, I, too, speak in favour of the amendment tabled by the noble Lord, Lord Higgins. Unlike my noble friend Lord Peston, I am in favour of the OBR. However, I share with my noble friend some anxieties about whether we need another set of economic forecasts. We should warrant another set of forecasts, in particular if the Treasury is going to produce its own, only if those from the OBR prove to be better and more accurate than those produced by commercial forecasters and other bodies. Therefore, it is important that we are able to analyse the forecasts made by the OBR, in order to understand the logic behind them and the assumptions that have been employed. That can best be done—and the veracity, standing and confidence that we wish to have in the OBR supported—if the model used by the OBR is freely available for analysis by peers, commentators and parliamentarians.

I have one question for the Minister. He has advised us that HMT will continue to produce its own economic forecasts. However, he has criticised HMT’s forecasts on the grounds of their accuracy and the spin placed on them by politicians. If he believes that HMT was leant on by politicians, it would be interesting to hear some examples, because during my 18 months in government I saw no evidence of Treasury forecasts underlying government policy being influenced in any way by politicians. The Minister has also criticised the amount of content of HMT’s published forecasts, including the fact that HMT did not publish forecasts for unemployment. Will he confirm that in future HMT will publish a full and comprehensive set of its own economic forecasts, which will in particular include forecasts for employment and unemployment?

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[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 Peston]

May I interrupt the noble Lord? I am totally puzzled now. The noble Lord uses the word “requirement”. The people who comprise the OBR will not be idiots. They are going to be experts and qualified economists. Quite independent of what is in this Bill, if the forecasting is not working well, they will ask themselves why they got it wrong. There is no need for a requirement here unless you assume that a bunch of morons is going to be appointed to the OBR. If you get a forecast wrong, you immediately ask why you got it wrong. Why is there a need for a requirement to do something that would be a normal way of working?

[Baroness Noakes]

I suggest to the noble Lord, Lord Peston, that it is not so much the requirement to do the assessment as the requirement to publish it that is important.

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[Lord Sassoon]

I am grateful to my noble friend for delivering my script for me. Perhaps I should declare my interest as a fellow of the Institute of Chartered Accountants in England and Wales. There is certainly a technical use of the word “audit” that we chartered accountants and other accountants are used to using. As my noble friend Lady Noakes has explained, my right honourable friend was using a more general use of the term. The Chancellor used the phrase in the very specific context of,

“audited all the annually managed expenditure savings”.—[Official Report, Commons, 20/10/10; col. 949.]

To be clear, there is no question of the OBR doing an audit in the sense used by, say, the National Audit Office. In the context in which my right honourable friend used the word “audit”, it is completely clear that he was talking about scrutiny of those particular savings, as set out in the terms of reference given to the OBR when it scrutinised the Government’s policy costings. If the noble Lord, Lord Barnett, wants clarity on the meaning of the word, the terms of reference are clear.

In answer to the questions about the number of contacts between the OBR and the Treasury, that information is now published on its website. Between 4 October and 29 November 2010, there are seven recorded contacts: four e-mails, two meetings and one transmission of a hard-copy document. As I say, all those details are on the OBR’s website for people to look at.

The clarity over the OBR’s role is provided for through the provisions in the Bill and the charter. There is no intention for the OBR to do an audit in the technical sense of the word. I hope that it has been useful to have had this short discussion to clarify that that is indeed the situation and, having agreed that, I do not think that we need to clutter up the Bill in the way that the amendment proposes. On the basis that it is not strictly necessary, I ask the noble Lord if he might withdraw it.

[Lord Peston]

My Lords, when it suits him, the noble Lord is keen on the casual use of language. Can I take it that “audit” does not now mean audit? Does it mean to scrutinise? Can we see the documentation corresponding to that scrutiny? Is it available?

[Lord Sassoon]

Indeed, my Lords, as I said, the form of the scrutiny is set out in the terms of reference given to the Office for Budget Responsibility for its review of the spending review and were published as part of the spending review documentation on the Treasury website. If it would help the noble Lord, I can read out the key paragraph of the terms of reference for the Office for Budget Responsibility. Paragraph 4, entitled “Economic and fiscal forecasts”, states:

“The Spending Review will allocate spending between departmental expenditure and annually managed expenditure within the envelope set at the June Budget. As part of the Spending Review, and consistent with the approach taken in the June Budget, the OBR will provide independent scrutiny of the Government’s estimated costing of annually managed expenditure (AME) policies”.

[Lord Peston]

I am sorry, but I would really like my question to be answered. I do not want to know the form; I want to see the actual scrutiny. Nothing in the big document includes that scrutiny. The Chancellor claimed, using the Minister’s words, that the OBR had scrutinised all these expenditure savings. I should like to see the document which says, “We looked at this and this is our analysis”. I want to see the scrutiny; I do not want to know how the office did it. I want to know that it was actually done. I have not the faintest idea of where to look for this scrutiny, but it is not in the big document—which is what I call it because I cannot remember its name. Where is it?

[Lord Sassoon]

My Lords, the scrutiny is one of the things that underpin what the noble Lord calls “the big document”. If the OBR had any questions about the AME numbers, it would litter its document with commentary on it. However, it is quite clear from the terms of reference given to the office by the Treasury that it was required to and did scrutinise the AME numbers and was free to make any comments it felt like making on them.

[Lord Peston]

I would like to see where they are. I know the difference between form and substance, and I would like to see the substance.

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[Lord Barnett]

I must tell the noble Lord that I may not be doing my job properly, but I do not spend my life going through Treasury or OBR websites. Perhaps I should; it might make me better informed. I would not go “over the top”, as the noble Baroness described me. I doubt it. It might make me even more so. The noble Lord, Lord Sassoon, has now told us information that I confess I had not read on the website. It may be that every other Member of the Committee has read it on the website.

[Lord Peston]

I did not.

[Lord Barnett]

I am sure that the noble Baroness, Lady Noakes, read the website carefully. She did not quote it to me, but I now have the figures, which are a bit disturbing. I will read them with greater care later. Once again, Robert Chote is doing the job that the OBR is being set up to do—to tell the world how good the Treasury is. I had a little experience at the Treasury for five years. Officials are excellent, in my experience. I can see them over there, but they are not nodding, because they would not do that. The noble Lord, Lord Sassoon, can nod on their behalf. He is quite right; they are very good. I always found them to be excellent. However, that does not make the Chancellor right in saying all the things he says, either in introducing the comprehensive spending review or at any other time. I confess not only to being not over the top but to being too moderate in my remarks. I am very concerned.

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Moved by

[Lord Peston]

29: Clause 5, page 2, line 35, at end insert “; and it may, in particular, take evidence from expert witnesses which it must publish”

[Lord Peston]

My Lords, of course I tabled Amendment 29 before I had heard the Minister’s replies to many other amendments. What he emphasised most was the independence of the OBR and its ability to make up its own mind what it wants to do. I assume therefore that when I say it should be able to do this, he will get up and say that it can if it wants to. I do not think that I need to detain the Committee much longer, but I would like to hear the Minister confirm that the OBR can do what it wants. I beg to move.

[Lord Sassoon]

I shall try to be almost as brief. I agree absolutely that the OBR should have access to external expertise and that there should be appropriate transparency around this. The design of the OBR will allow it to have access to external expertise as it sees fit, and indeed the office held a range of discussions prior to producing the recent forecast. The office may convene advisory panels if it thinks that that sort of external perspective would be of help.

My only difficulty with the amendment is that the office would be required to publish the evidence taken from expert witnesses. I think that it should be for the OBR to determine what it thinks it is appropriate to publish. That is because we do not want to constrain freedom of exchange. The office has a general statutory duty to act transparently, within which context obviously it will think carefully about what it should publish. Further, although I hope that it will not be necessary, there is of course the backstop of the Freedom of Information Act to which the OBR is subject. I think we should leave it to the discretion of the OBR to choose to publish evidence from such experts as it consults.

I hope that my response has given the noble Lord, Lord Peston, the confirmation that he was seeking, and that he will feel able to withdraw his amendment.

[Lord Peston]

I thank the Minister very much for that answer. I, too, am making the assumption that the OBR will read our debates and therefore know what we think. Subject to that, I beg leave to withdraw the amendment.

Amendment 29 withdrawn.

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[Lord Higgins]

I should perhaps have said in my opening remarks that I had, in effect, had second thoughts. It may be that my amendment simply leaves open the question, but we really want to clear it up.

[Lord Peston]

My Lords, I speak to Amendment 32, which is in my name and that of my noble friend Lord Barnett. When I first saw subsection (3), I must say that I was appalled, in particular by the words “may not consider”. This body is supposed to be independent and, unless we are to get a new form of thought police brought in here, can presumably consider anything that it likes. That does not mean that it should be involved in a report on itself. However, to tell a group—at the moment, a group of three expert economists—that what it can think about is limited by an Act of Parliament is absolutely absurd. I draw the Committee’s attention to what “may not consider” means; that you cannot even think or talk about something and that it has nothing to do with you. This is incompatible with the group’s independence and professionalism. I wonder what serious, self-respecting economist would wish to work under those circumstances. I would not, under any circumstances, be willing to work and be told that. I can remember the sad old days in the Treasury when everybody was told that under no circumstances were we ever to discuss or use the word “devaluation”. It did not have any effect: we just did it privately or secretly, and so on. That was the worst example of this that I can remember.

I was appalled by this subsection and I thought that taking out “not” was the best way of dealing with it. However, the method proposed by the noble Lord, Lord Higgins, is better still: take out the whole subsection. It may well be that we could put in another clause of a more positive nature. It is perfectly obvious that the OBR’s job is to consider the whole issue in the context of government policy, because, as the Minister has emphasised—although I slightly disagree with his logic—the OBR is not a decision-making body, it is just a forecasting body. I do not entirely accept that distinction, as noble Lords are aware, but I can at least see the Minister’s position. I accept what my noble friend Lord Eatwell and others have said; that forecasting is the OBR’s main role. There should not be a clause in what will eventually be a statute telling the OBR what it may consider, unless the meaning of “consider” in the English language has changed. My general view is that the approach of the noble Lord, Lord Higgins, was much better than mine or that of the noble Lord, Lord Barnett. We should remove subsection (3).

[Lord Newby]

We had a long debate on this issue at our previous meeting and I am not going to rehearse all the arguments. I suggested, out of frustration, that we were spending too long on this form of words, which, in slightly more words, actually had the same purpose as Amendment 31. We did not spend any time looking at it, because we were considering the amendments in order. However, Amendment 31 is clear and achieves the purpose that we sought to achieve in our debate last time, which was that the OBR, in making its assessments, obviously should take account of government economic and other policies. Equally, in the context of the second part of the subsection, the OBR’s role should not be what the noble Lord, Lord Peston, thinks it would be. It should not be able to stray and look at anyone’s alternative policies—that way madness lies. The OBR must have a straightforward remit to look at what the Government are proposing and work on the assumptions that the Government are making in their policies.

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[Lord Sassoon]

My Lords, perhaps I might go back to confirming what we are seeking to do and not to do in the Bill. We have discussed all these related issues at some length. The noble Lord, Lord Burns, has got it pretty much spot on in terms of what we are trying to achieve, but for the avoidance of doubt I shall restate it.

With regard to the core forecasting remit, the intention is that the OBR should consider government policies and not other policies. To take the point made the other day by the noble Lord, Lord Eatwell, we want to ensure that the OBR can take account of external shocks, for example, so in technical drafting terms his amendment would not quite work as it focuses narrowly on policy. We agree, anyway, that it is the Government’s policies and not other policies that need to be considered. We must not leave out the fact that, in doing the forecasts, the OBR can look at scenarios and at other issues.

With regard to the noble Lord’s specific question about an EU-related policy, either it has been adopted by the UK Government and is therefore included in government policies or it is not. Either the EU policy example has been adopted as policy in the UK or it has not, therefore it falls accordingly. That would get picked up, so that much is clear. Equally, it is the clear intention that the OBR should not be drawn into costing alternative policies, whether they are opposition policies or just other scenarios or partial packages of policies. That is what is intended by the construct in the Bill, and part of it is clarified by paragraph 4.12 in the draft charter.

Even though I am convinced that the Bill achieves what most, if not all, of us are trying to achieve in these various respects, I take to heart the fact that we have spent a lot of time going around the interaction of Clauses 4 and 5(3) and, to an extent, the relationship with Clause 1. Notwithstanding the fact that I think that the Bill works as drafted, I am listening carefully to all the points being made. I will go away and see whether anything can be done to make it even clearer in the Bill what the intentions are. However, it is difficult drafting. We should certainly not take out Clause 5(3) in its entirety, because, as the noble Lord, Lord Burns, pointed out, we want to make sure not only that the forecasts are concentrated on the right thing but that the OBR is not drawn into other political controversies.

[Lord Peston]

Can the noble Lord give one clarification on that? We all agree that, if we are going to have an OBR, we must keep it out of political controversy, but do the “government policies” to which he referred include the behaviour of the Monetary Policy Committee of the Bank of England?

[Lord Sassoon]

When I talk about government policies, I mean government policies. What assumptions the OBR makes about monetary conditions, interest rates and so on touches on an issue about which my noble friend Lord Higgins asked earlier. I have undertaken to relay his request to see whether Mr Chote wants to say any more about how the OBR considers monetary policy issues. Certainly, while I said that the OBR should consider government policies, there are lots of other things that it needs to consider. It is clear that it is making assumptions about interest rates and so on that are taken broadly from what the Bank of England lays out.

[Lord Peston]

Since we are putting this on the statute book, is it the case that the OBR would not be offending the law, as it will eventually be, by paying great attention to what the Monetary Policy Committee of the Bank of England was up to? I merely want some reassurance on that. There is no way in which it can do any forecasting unless it does that.

[Lord Sassoon]

I assume that in all normal circumstances it will look intently at the forecasts of the MPC about future inflation and interest rate prospects.