Budget Responsibility and National Audit Bill [HL]

Lord Sassoon Excerpts

Monday 8th November 2010 Lords Chamber

Moved By

[Lord Sassoon]

That the Bill be now read a second time.

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

My Lords, the Budget Responsibility and National Audit Bill makes provision to enhance the transparency and accountability of the public finances. The Bill has two main subjects: first, it establishes the Office for Budget Responsibility on a statutory basis as part of broader reforms to the UK’s fiscal framework; secondly, it modernises the corporate governance of the National Audit Office. I will speak to each subject in turn.

Fiscal discipline is perhaps the single greatest priority for this Government. We are all aware of the current fiscal climate and the situation that we are in. To address that situation, the Government are taking action on a number of fronts. In June, the Chancellor announced the Government’s intention to eliminate the structural current deficit in this Parliament and to put debt on a sustainable downward path. We set this out through our new fiscal mandate. Last month, the spending review comprehensively set out the spending reductions that will deliver this mandate. The plans are tough, but they are fair and deliverable. Now, through the Bill, the Government are strengthening the framework of the UK’s fiscal institutions.

The greatest single step forward is the establishment of the independent Office for Budget Responsibility, which will make independent assessments of the public finances and the economy. Up until the new Government’s first Budget, the responsibility for producing the official forecasts had rested with the Chancellor. The key judgments were made by Ministers, but the possible incentive to forecast optimistically, whether on lower borrowing or higher growth, led to scepticism over the credibility of the forecasts. Budget forecasts over the past decade consistently underestimated borrowing, compared to both its actual level and to what other independent forecasters expected at the time. The coalition Government intend to take a different approach.

We have removed the responsibility for forecasting from Ministers and given it to independent experts. The independence of the OBR’s judgments will ensure that policy is made on an unbiased view of future prospects. The establishment of the OBR is a reform that has been welcomed by both the IMF and the OECD. In its recent Article IV report on the UK, the IMF has said that the OBR is,

“a welcome step toward strengthening the budget process”.

The OECD has said that the OBR is an important initiative in improving public confidence. The UK is now one of the few advanced economies in which an independent fiscal institution produces the official forecast. It is worth emphasising this point because it influences many aspects of the legislation.

As I have explained, the establishment of the independent OBR will completely overhaul how the Budget is put together—indeed, it already has. The OBR was set up on an interim basis immediately after the coalition was formed. Led by Sir Alan Budd, in only a few weeks the OBR produced an independent assessment of the economy and public finances both ahead of and as part of the emergency Budget in June. It also scrutinised the Government’s assessments of the cost and yield of budget policy decisions and confirmed that we are on course to meet our fiscal mandate. Great strides were also made in transparency. More information was published than ever before—a fact noted by both the Treasury Committee and the IFS.

The final task of the interim Office for Budget Responsibility was to provide advice on how the permanent, statutory OBR should be established. I am happy to report to the House that the Bill is designed in line with the detailed recommendations made by Sir Alan Budd in his letter to the Chancellor. We are now moving to permanent arrangements and a new Budget Responsibility Committee is in place, to which Robert Chote, Stephen Nickell and Graham Parker have been appointed. Their appointments were subject to the confirmation of the Treasury Committee. The resources made available to the OBR have been increased. There has been a transfer of technical forecasting capacity from the Treasury to the OBR and a transparent, multi-year funding settlement has been agreed for the spending review period. Robert Chote has also announced a new location for the OBR’s offices, outside of the Treasury building.

I turn to the specific provisions of Part 1. The Bill will repeal the previous Government’s fiscal framework, including the Fiscal Responsibility Act 2010, and replace it with reformed and streamlined provisions. Clause 1 requires that the Treasury must produce a charter for budget responsibility, which will set out the Government’s objectives for fiscal policy, particularly the fiscal mandate. Clause 2 requires the Treasury to produce a budget on an annual basis. Clause 4 sets out the main duty of the OBR to examine and report on the sustainability of the public finances.

The Bill also makes explicit provision that the OBR has complete discretion over how it carries out its statutory duties. This is a broad remit and is not limited to forecasting. However, at a minimum the OBR will be required: to produce economic and fiscal forecasts at least twice a year; to make an assessment on the likelihood of the Government meeting their fiscal mandate alongside those forecasts; to publish a sustainability report at least once a year; and to publish a report on the accuracy of its forecasts at least once a year.

Clause 5 lays down a set of principles that will guide how the OBR goes about fulfilling its remit. The OBR must perform its duty objectively, transparently, impartially and on the basis of government policy. These principles protect independence and ensure a clear separation between analysis and policy-making. Analysis is rightly the domain of the OBR, but policy-making is the responsibility of publicly elected Ministers. The charter for budget responsibility will set out further details on the OBR’s remit and a draft will be made available to the House.

The establishment of the OBR takes executive responsibilities for producing economic and fiscal forecasts out of the hands of Ministers and entrusts them to an independent body. The OBR will report directly to Parliament on the public finances and the members of the Budget Responsibility Committee will be available for select committee scrutiny. The OBR’s forecasts and analysis will be laid directly before the House. On funding, there will be separate reporting of the OBR’s expenditure in the estimates that the Treasury presents to Parliament. In addition, the OBR will be able to submit an additional memorandum alongside that of the Treasury. Written Questions will be passed to the OBR to respond to. All these measures will enhance the ability of Parliament and the public to hold the Government to account for their fiscal policy. In terms of institutional status, the Bill establishes the OBR as an executive non-departmental public body. This status gives the OBR its own legal identity. Conferring Crown status allows appropriately skilled civil servants to move easily to and from the OBR.

The OBR’s executive responsibilities are to be undertaken by the three-person Budget Responsibility Committee. Its members will be appointed by the Chancellor, but the Bill provides the Treasury Select Committee with a veto over their appointment and dismissal. The Chancellor has said that he is giving the committee this veto to ensure that there is no doubt that the individuals leading the OBR are independent and have the support and approval of the committee. A chairman will lead the BRC and run the office. All staff will report to the chair, who will control the hiring and firing of the staff. In addition, there will be at least two non-executive members to provide support and constructive challenge.

For the BRC and its staff to produce the best possible forecasts and analysis, they will need access to the necessary resources and information. Clause 9 gives the OBR a statutory right of access to all government information that it may reasonably require. To facilitate close working, memorandums of understanding will set a framework for the working relationship between the OBR and other government departments. The provisions of Part 1 deliver the coalition’s aims of increasing transparency and enhancing accountability for the public finances; the same aims apply to the scrutiny of public expenditure, which is the subject of Part 2 of the Bill, to which I now turn.

Part 2 of the Bill modernises the governance of the National Audit Office. The NAO is best placed to assess the Government’s use of public funds, especially in the current climate. Effective independent oversight of spending is critical when public resources are under such pressure. The provisions of the Bill strengthen the resilience and integrity of the body. Noble Lords will be aware that very similar provisions were included in the previous Government’s Constitutional Reform and Governance Bill but that there was no time for the House to consider these provisions at the end of the Parliament, so they were lost at that time. This Bill represents the earliest possible opportunity in the new Session to bring them before the House.

The provisions in Part 2 implement recommendations made by the Public Accounts Commission following its review of the NAO’s corporate governance arrangements. Clause 11 confirms that the office of the Comptroller and Auditor-General will continue. The C&AG will be an independent officer of the other place who will be limited to a single term of 10 years. Clause 20 provides for the establishment of the new National Audit Office as a corporate body. Of course, the NAO already exists, but Clause 20 incorporates it formally for the first time as a body corporate. The new NAO’s functions include: providing resources for the C&AG’s work; advising him on that work; and approving certain services. The NAO will be able to support and challenge constructively the C&AG’s decisions, but it may not prevent him from carrying out his statutory responsibilities. The NAO will have a majority of non-executives and be led by a non-executive chair. The C&AG will be the chief executive but will not be an NAO employee.

I emphasise that those provisions do not compromise the discretion of the C&AG in forming audit judgments and in carrying out value-for-money studies. When the provisions were discussed in the other place during the passage of the Constitutional Reform and Governance Bill, both the then chairs of the Public Accounts Commission and of the Committee of Public Accounts supported them. Schedules 2 and 3 set out details on the new NAO and the relationship between the new NAO and the C&AG. Schedule 6 provides a framework power to enable the National Assembly for Wales to legislate for the governance arrangements of the Wales Audit Office.

The provisions in the Bill are a key part of the Government’s fiscal reforms. They will provide a strong institutional framework for the future and help secure the sustainability of the public finances. I beg to move.

--- Later in debate ---

[Lord Sassoon]

My Lords, I thank noble Lords for their contributions to a stimulating and interesting debate on both parts of the Bill, although noble Lords focused more on Part 1 than Part 2. The debate has focused on the role of institutions and the part that they can play in ensuring transparency and accountability in the public finances. This is clearly a matter of much importance at the current time. At the beginning of the debate I explained the Government’s broader plans to reform the fiscal framework, and the establishment of the Office for Budget Responsibility is the most substantial aspect of this reform. For the first time, we are introducing independent and impartial scrutiny into the official forecast.

I should start by welcoming the confirmation by the noble Lord, Lord Eatwell, that the Opposition welcome the creation of the OBR, which was confirmed by the noble Lord, Lord Tunnicliffe, just now. The only substantial note among those who have spoken this afternoon questioning the purpose of change has come from the noble Lord, Lord Barnett. However, I think that the reason for change was very clearly set out in different ways both by my noble friend Lord Newby, who quoted from ministerial memoirs from the former Government, and by the noble Lord, Lord Turnbull, who made it quite clear—he referred to wishful thinking in the past—why, in his words, this is an idea whose time has come. I completely agree with that. I should as a rider say that I was not in what I said questioning in any way the work of Treasury officials. I would like to think that the noble Lord, Lord Barnett, recognises that. What I was questioning was precisely the way in which forecasts were put together—whether it was by way of wishful thinking or whether it was something more sinister in the past. That is precisely why I think that the overwhelming majority of speakers this afternoon have confirmed that the OBR’s time has indeed come.

I shall come back to the point about independence.

[Lord Barnett]

The Chancellor, in his comprehensive spending review speech, referred to the previous forecasts as dishonest.

--- Later in debate ---

[Lord Sassoon]

I think that the noble Lord was also quoting remarks that I made in my opening speech this afternoon. I have tried to make it clear that I am not in any way questioning the very fine work of Treasury officials, but questioning the overlay that was put on the forecasts whether as a result of wishful thinking or for whatever other reason.

[Lord Myners]

My recollection of the words that the noble Lord, Lord Barnett, used was “official forecasts”. So I think it is quite clear that the Chancellor of the Exchequer had in mind forecasts by the officials. Is the Minister aware of any case in which an official objected to an economic forecast that the Government presented to Parliament on the basis that it was incorrect? I certainly participated in discussions on economic performance and I saw no examples of officials objecting to the work which came from Mr David Ramsden and other members of the Treasury responsible for economic forecasting under interrogation by Ministers. Will the Minister make it clear that the use of the term “official forecasts” was not a criticism of officials? If it was a criticism, on what basis was it made, given that there were no objections?

[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.

[A noble Lord]

They are paramount.

[Lord Sassoon]

Indeed. While the Bill makes it clear that the charter may include guidance to the OBR on how it should perform its main duty, the charter must not make provision about the methods the OBR should use. That is absolutely clear and I am glad that we agree on it. Nevertheless, to provide the OBR with guidance on how it should fulfil its duties is not, in the Government’s judgment, inappropriate. While the OBR will need to act consistently with any guidance in the charter, any such guidance will have been approved by another House, so it will be wholly transparent.

The noble Lord, Lord Burns, asked how far the remit can be stretched by the guidance. It can relate only to the functions conferred by the Bill, so it cannot add to or in any way distort the remit and it has to be exercised consistently with the Bill. It cannot compromise, for example, the basic principles set out in Clause 5(2), but it can explain how they are to be applied. I do not think that the guidance should in any way lead to mission creep.

Questions were also asked about resources and whether the chair of the OBR should report each year on whether he has sufficient resources. There will be transparency of reporting through the Treasury Estimates and accounts. The non-executives will be expected to inform Parliament of any concerns they have over the independence of the OBR and its resources, and the OBR will present its annual report and accounts to Parliament through the Treasury. There will be ample opportunity, through direct contact with the Treasury Select Committee, to air any concerns on resources.

In answer to a question from the noble Lord, Lord Myners, I can give him an absolute assurance that the OBR will have full autonomy over its work programme, and within its statutory duties it will not be required to secure the Treasury’s approval of its work. On another dimension of independence raised by the noble Lord, Lord Myners, and my noble friend Lord Higgins, regarding whether the minutes will be published, that will be a matter for the OBR but I am sure that it is listening carefully to this debate.

Questions then followed about the accuracy of the forecasts and peer review. The crucial point about these sorts of forecast is that they will be wholly transparent. Each time the forecasts are published, the outcome will be clear. It will then be for all experts, economists and commentators, both Houses of Parliament and its committees to scrutinise the information. However, the Bill allows the OBR to establish expert committees if it so wishes to help it with analyses or for any other purpose.

The noble Lord, Lord Barnett, asked about meetings between the OBR and Treasury Ministers. This is something on which the OBR has been reflecting, and it has decided that in order to ensure that communications with the Treasury are transparent, the OBR will aim to publish a log of contact twice a year, each autumn and at the time of the Budget. This will begin with the autumn forecast on 29 November. I know that the noble Lord has tabled a Question for Written Answer on that point.

A number of questions were put to me about the functions of the non-executive directors. When I first saw the Bill there was a distinction between professional and non-professional. I hope noble Lords will agree that expert and non-expert improves the drafting a little, but I take the point that, equally, the words executive and non-executive could be used. For the moment I will say that the legislation follows what is common in other legislation establishing statutory bodies, including Natural England, Ofgem, the Office of the Rail Regulator, the Office of Fair Trading and the UK Statistics Authority. I will reflect on the points made about the non-executives, but the critical point is that it will be for the first meeting of the board to decide exactly what the remit should be. I think it was the noble Lord, Lord Burns—I hope I will be forgiven if it was not him—who described the remit and his description encapsulated it rather well.

Questions were asked about the relationship with the Bank. It is expected that the OBR will have a good relationship with the Bank and there will be a regular exchange of views. But it is critical that there should be no collusion between them in any sense in producing their forecasts. They should be completely independent.

Points were raised by my noble friends Lady Noakes and Lady Browning about the relationship with other government departments. Indeed, the MoUs will cover departments other than the Treasury.

[Lord Higgins]

Are we to understand that there will be two sets of forecasts? In that case, which will prevail?

[Lord Sassoon]

My Lords, at the moment separate forecasts are made by the Treasury and the Bank of England in the course of their inflation reporting. That situation will continue.

There were detailed questions about freedom of information, on which I will write to my noble friend Lady Browning. I can assure her that freedom of information legislation applies.

There will be no changes to the debt management arrangements. I agree with the noble Lord, Lord Myners, that the Debt Management Office does a fine job.

I want to spend one minute talking about the National Audit Office, because—

[Lord Barnett]

Before the Minister does that, he said that the Freedom of Information Act applies. The Chancellor referred to the audit done by the OBR on his comprehensive spending review. Will we see that?

[Lord Sassoon]

I have already said that the next forecast will be produced by the OBR before the end of this month. Clearly, that will include forecasts based on all decisions taken by the Government, including the comprehensive spending review. We have approximately three weeks to wait for that.

I want to spend one minute on the points made about the National Audit Office. The critical point is that credit is due to the Public Accounts Commission for its work that led to the Bill brought forward by the previous Government and on which we have built. In answer to the points made by my noble friend Lady Browning, the provisions enshrine the independence of the Comptroller and Auditor-General. A similar point was also made by the noble Lord, Lord Touhig, to whom I am grateful for his welcome of the provisions relating to Wales. I will respond in writing to his detailed point that the period should be five years rather than two years or what was proposed by the Public Accounts Commission. I am grateful to noble Lords for confirming our direction of travel on the National Audit Office provisions.

I conclude by thanking all noble Lords who have attended and spoken in this debate—

[Lord Myners]

Before the Minister concludes, would he like to have a second try at answering the question asked by the noble Lord, Lord Eatwell, about the terms of Clause 6(1)(b), which require the Treasury to give guidance on the meanings of the words “objectively, transparently and impartially”? Why would the Treasury need to give guidance on such matters? Surely it should be for the courts to determine that in any situation in which those words were subject to debate or criticism.

[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.

House adjourned at 5.51 pm.