Budget Responsibility and National Audit Bill [HL]

Lord Turnbull Excerpts

Monday 29th November 2010 Grand Committee

[Lord Higgins]

I shall try to speed up the proceedings in the light of what the noble Lord, Lord Barnett, has said. We have a specific amendment to the Bill and the Minister can say one of three things. He can say: “I accept it and will table an amendment at a later stage”; “I do not accept it for the following reasons and we will return to the matter if we wish at the next stage”; or, “I am not sure, so I’ll think about it and return to it at the next stage”. I am not in the least clear whether he proposes to accept, reject or think about the amendment.

[Lord Turnbull]

May I respond to the noble Lord, Lord Myners? He talked about not restricting the OBR’s ability to comment on general economic matters. We are trying to create an instrument of fiscal policy, not a council of economic advisers that can comment on issues, such as whether the economy is competitive, whether we have the right set of industry instruments or whether the policies are correct for the flexibility of the labour market. The OBR can forecast the effects of the policies as they stand. There are references to the Government providing the OBR with as much information as possible to enable it to make those forecasts, but it is not the OBR’s role to become a general commentator, as happens in some other countries, on all aspects of economic policy generally. Some of the amendments seem to be taking us towards that goal.

[Lord Sassoon]

I am grateful to the noble Lord, Lord Turnbull, for pointing that out. I do not accept the analysis of the noble Lord, Lord Barnett. Yes, it is correct that, as exemplified by what we have seen today, the OBR indeed has the freedom to do what Members of this Committee are asking for, but that is not what these amendments are essentially about, as the noble Lord, Lord Turnbull, pointed out. Clause 1 is not about the Office for Budget Responsibility doing things; it is about the Treasury producing a document to be known as the charter for budget responsibility. We could require the Treasury to produce all sorts of documents laying out economic policy and a huge number of other things, but the point of the clause is for the Treasury to prepare a document, the purpose of which is to set the background against which the OBR does its work. I have obviously failed to explain it, but the very distinguished former Permanent Secretary has come to my aid to point out that the Bill will set up an office focusing on fiscal policy. That is why the charter relates to fiscal policy. We do not want to widen it out, as the noble Lord said, to a document that sets a background for this office to go into all sorts of wider economic commentary. That point, as my noble friend reminded us, was made by the Treasury Select Committee.

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[Baroness Noakes]

My Lords, if this document is really about fiscal policy and the fiscal mandate only, it is entirely logical that the approval of the charter and the other matters referred to in the other amendments in this group should be for the other place. If it were widened to include economic policy, which most of us here, with the exception of my noble friend, favour, then it would be entirely logical for it to be widened to include the House of Lords, but I believe that, as currently drafted, it is entirely logical to confine it to the other place.

[Lord Turnbull]

I shall take issue with the noble Baroness, Lady Noakes. I think there is a distinction between the substance—fiscal policy—which it is well accepted is a privilege matter for the House of Commons, and what we are talking about—the governance structure of policy—which is, in a sense, a quasi-constitutional issue. We are talking about the charter, not fiscal policy. This is an area in which the House of Lords has some expertise. Therefore, I conclude exactly the opposite—that the charter should be rightly within the purview of the House of Lords, even when the fiscal policy is not.

[Lord Myners]

My Lords, we all now wait with bated breath to see whether the word “resist” appears on the Minister’s brief. Perhaps I may share my own experience with the Committee. When I became a Minister, I was told that of course there would be some duties in the House of Lords but that I should not worry about that. In fact, every effort would be made to reduce those duties to an absolute minimum. I came to the conclusion that most people in the other place had a very poor appreciation of what happens in the House of Lords and of the excellent work that this House does, particularly in revising legislation. That is particularly pronounced in the Treasury. When I became a Minister in the Treasury, I found that there was almost no institutional knowledge there about the processes of the House of Lords. The noble Lord has succeeded me as a Peer based in the Treasury, but you then have to go back 25 years to the noble Earl, Lord Caithness, to find the last Member of the House of Lords who was a Treasury Minister, and another 10 years before you come to Lord Cockfield, who was a GOAT in his own day, although not so described. The Treasury starts with a disposition that matters to do with the economy and finance should not detain the House of Lords. Therefore, the purpose of the amendment is correct in ensuring that the House of Lords is respected in the contribution that it can make by virtue of the breadth of experience represented on the Benches. I support the amendment.

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[Lord Sassoon]

I have made it completely clear that I think it is absolutely appropriate and important that this House considers fiscal and economic matters; and within the framework of the Bill there are opportunities to which I have specifically drawn attention, whether they are on the Floor of the House or in the Economic Affairs Committee. I am not for one minute challenging the ruling, but that is a different proposition from the specific proposition that this House should be responsible for voting on the adoption of the charter, which has within it a specific mandate that is in the province of another place. That does not cut across the absolute right that this House must have, whether in full session or in a committee, to consider fiscal matters, and I have drawn attention to four references in the Bill where that is made completely clear. That is different from the question of the approval of and voting on the charter, which contains the mandate. That would be straying into territory into which this House should not stray, as my noble friend Lady Noakes has said. The same principle held under the previous fiscal policy framework. I am not saying that just because something was held previously it should necessarily mean that it should always be right, but it is important in this context to remind ourselves that the code for fiscal stability, which the charter replaces, was approved and subject to amendment through a resolution in another place; and the fiscal targets set through the fiscal responsibility—

[Lord Turnbull]

Perhaps I may suggest a way through this. One of the problems is that the action in subsection (7) could take place before the House of Lords has had a chance to comment on it. There is not even a right of consultation and no right even for noble Lords’ views to be heard before the House of Lords votes. If the Minister wants to retain the ultimate right of decision, something may perhaps be done about the sequencing, whereby the decision does not take place until the Economic Affairs Committee or whoever has had a chance to consult on this matter. That would enshrine the right to involvement, but would not give the House of Lords a right to decide in areas where you do not think it should have that right.

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[Lord Higgins]

In moving the amendment, I think that it would be helpful to discuss Amendments 21, 33 and 38. I shall dispose of Amendment 38 immediately as it is rather oddly grouped with the other amendments. It refers to leaving out “paragraph (c)”. That part of the Bill says that the OBR must,

“publish the report … lay it before Parliament, and … send a copy of it to the Treasury”.

I tabled the amendment as it seems rather absurd if the office has to publish and lay the report before Parliament that it should need to send a copy to the Treasury. We could make a substantial saving in public expenditure on postage by eliminating that and I hope that my noble friend will accept that amendment.

Amendments 7 and 21 take a diametrically opposed view to that expressed by the noble Lords opposite in Amendment 33. Amendment 7 states:

“The Treasury shall not make economic forecasts covering the same areas as those of the Office for Budget Responsibility”.

There is a case for including that in the Bill because, otherwise, after going through all the expense of the OBR, we will find the Treasury still duplicating it unnecessarily. I hope that my noble friend can accept that amendment.

Amendment 21 is an important amendment dealing with the forecasts and suggests that we should insert,

“which are agreed with the Bank of England; the agreed forecasts will then be used both by the Treasury and the Bank of England”.

If our economy is not to be managed in a totally schizophrenic manner between the fiscal and monetary side of things, it would be quite absurd if the two bodies will not use the same forecasts. Otherwise we are bound to end up with a situation where monetary policy goes one way and the forecast on which the decisions are based may be quite different from that of the Office for Budget Responsibility. That seems an eminently sensible suggestion. It is categorically contradicted by the amendment in the name of the noble Lords, Lord Peston and Lord Barnett, which says that the,

“Office must always act independently of the Monetary Policy Committee of the Bank of England, especially in regard to its forecasts”.

I do not think that the Bank of England can have one set of forecasts and the Treasury another without there being some risk that economic policy is in conflict between monetary and fiscal policy. I beg to move.

[Lord Turnbull]

My Lords, I speak almost in direct contradiction to the noble Lord, Lord Higgins. The current draft of the fiscal framework says:

“The Government intends to adopt the OBR’s fiscal and economic forecasts as the official forecast of the Budget Report. The Government retains the right to disagree with the OBR’s forecasts and, if this is the case, will explain why to Parliament. The Treasury will continue to maintain the necessary analytical and macroeconomic expertise to provide on-going advice to the Government”.

I would say that that is absolutely spot on and what the relationship should be. Treasury Ministers have the ultimate accountability and should, if they feel it essential, be able to state their view and then justify it in a very important area, which is different from monetary policy. They take fiscal policy decisions; they do not take monetary policy decisions. This is the correct formulation and I hope that it will be supported. The Treasury will, of course, need to maintain a separate apparatus. If the entire forecasting apparatus were transferred to the OBR it would be necessary for the Treasury, for all sorts of other purposes—if only to answer questions from Parliament—to retain some apparatus. Then you would get unnecessary duplication.

On the question of whether the Bank and the OBR should agree a common forecast, it is surprising that someone from the Conservative Party is suggesting a monopoly. I think that the element of competition is important and, if the two forecasts differ, we ought to know why. Parliament, the EAC and its equivalent committee, the Treasury Select Committee, should examine why the two bodies have different views, rather than try to suppress them and coerce them into some kind of lowest common denominator. Therefore, I am not attracted at all to this group of amendments and I think that paragraph 3.7 of the draft charter is exactly where we should be.

Budget Responsibility and National Audit Bill [HL]

Lord Turnbull Excerpts

Monday 8th November 2010 Lords Chamber

[Lord Turnbull]

My Lords, several justifications have been given to the budget responsibility half of this Bill. Originally there was talk of a fiscal policy committee as a mirror to the Monetary Policy Committee, but it soon became apparent that fiscal policy is quite different from monetary policy. The interest rate required to achieve a given rate of inflation is largely a technical issue, but the question of the size of the budget deficit and how the burden is shared between one generation and the next is political, as is the issue of the extent and distribution of public services. The fiscal policy mandate, therefore, must remain with the Chancellor of the day.

The current Chancellor has spoken of the need to prevent the Chancellor of the Exchequer from “fiddling the figures”. I do not think that that is an adequate explanation or that there is a true forecast but the Chancellor knowingly presents a false one. All forecasts are judgments, although some may be more plausible than others. The main problem is wishful thinking and a lack of objectivity about one’s own work—being judge and jury in one’s own cause. The problem has existed for a very long time and has affected some exalted people. We find it in chapter 1, verse 31, of the Book of Genesis:

“God saw everything that he had made and behold it was very good”.

A son of the manse might have been familiar with that.

To continue the religious theme, the previous Government were believers in the doctrine of what Stephanie Flanders of the BBC called the “immaculate recession”, in that it had no preceding boom and everything was on track and on trend until the world financial crisis hit us out of the blue. We must ask ourselves how it came about that after 60 quarters of consecutive positive growth—after boom and bust had been eliminated—we entered the recession with a structural deficit. Despite supposed adherence to the golden rule, there had been a cyclically adjusted current deficit in each of the six years to 2007-08. Public expenditure had been growing significantly faster than GDP, while the tax to pay for it stayed flat as a proportion of GDP.

We can now see that at least two errors were embedded in the fiscal policy of this period. It was claimed that the underlying rate of growth of GDP was 2.75 per cent per annum. That has now been revised down by OBR to around 2.25 per cent. Many observers believe that it could have been lower even before the recession. Had this more cautious rate been embedded in the public sector finances, as page 21 of this year’s Red Book explains, it would imply that the structural position of the public finances was worse than estimated at the time.

The second error was in assuming that a number of sources of revenue were sustainable, but the VAT receipts from credit-fuelled consumption, the various receipts from an overheated property market and the taxes levied on bank profits have all proved exaggerated. That point was acknowledged on page 201 off the April Budget document. In my view, all this makes a powerful case for introducing a greater degree of challenge and independent scrutiny into the fiscal framework. While it is true that, unlike monetary policy, the final decisions on the Budget will still rest with the Chancellor of the Exchequer, the political cost of departing from the OBR’s forecast is greatly raised.

Just as central bank independence was the big idea of the 1990s, greater scrutiny by independent financial councils is the current new idea, urged by both the IMF and the EU. It is ironic that this Government find themselves adopting a proposal supported by the EU, although the difference is that we want to construct our own mechanism rather than be subject to the scrutiny of the Commission or other member states.

Another benefit from the creation of the OBR relates to the fact that, even if the fiscal projections are basically sound, a number of tricks can be played in the presentation of the details: judicious choice of time periods, splicing different time periods together or switching between different definitions. In part, it will fall to the Statistics Commission to put an end to these and point them out, but the OBR can help by presenting its analysis on a consistent basis.

Like many others, I believe that the OBR is an idea whose time has come, but what about the detailed structure that is being proposed? In short, I believe that the Treasury Select Committee and the Government have broadly come to the right conclusion. I wonder whether the noble Lord, Lord Eatwell, considers that the Bank of England would pass the tests that he has set. After all, the Chancellor sets its mandate, chooses the members of the MPC and prescribes the mechanisms for accountability.

Some have argued that the OBR should be entirely independent of the Treasury, with its own staff, its own models and its own premises—this is what one might call the self-sufficiency model. The problem with that is what Sir Alan Budd has called “harvest time”: in certain months of the year around PBR and the Budget, it is all hands to the pump. Maybe 200 people are involved in preparing Budget forecasts, including experts on the North Sea, social security benefits or EU finances. At other times, they go back to their other duties. If these resources were transferred, the Treasury would need to recreate them for its own policy development work.

At the other end of the spectrum was what may be called the validation model—all staff stay in the Treasury but none of their work can be published unless it has been validated by the OBR. I was initially attracted to this but I believe that the Treasury Select Committee and the Government have correctly concluded that it would not carry conviction. What is proposed is a pragmatic and, in my view, well judged hybrid, with a core of around 20 staff being transferred but the work of all people involved in the Budget being validated.

The Treasury Select Committee proposed a non-ministerial department. The Treasury has responded by proposing a non-departmental public body. This is a distinction without a difference. The key issue at stake is the assurance that the OBR is adequately resourced and, if the funding coming from the Treasury is thought to be compromising its work, the chair is free to raise the matter with the Select Committee.

The real choice is between an OBR that is on the executive side of the fence and one that is an emanation of Parliament, like the NAO. Both the Treasury Select Committee and the Government have opted for the former, which I believe is right. The OBR is not just a commentator or expert auditor. It has an executive function: it supplies the Treasury with the basis for its projections. Another safety valve in the Bill, which I think should be supported, is the provision for two or three non-executives. Their role, I think, is to protect the OBR’s independence, to sort out tensions between the OBR and the Treasury and possibly to ensure that the chair of the OBR does not go off on an ego trip. I support both the structure and operating model that have been devised, but we have to recognise that these arrangements are experimental and, whether or not a review is provided by statute, we should certainly revisit the design in a few years’ time.

The other half of the Bill relates to the NAO, on which there is really only one issue, which is to provide that the C&AG should serve a single 10-year term. This prevents a repetition of what I consider to be gross mismanagement by the Public Accounts Commission in allowing the last C&AG to serve for 20 years, which was far too long. It was always ridiculous for the NAO to be urging best corporate practice and governance on departments while failing to practise it itself.

The new NAO leadership has an opportunity to develop the way in which the NAO operates. Historically, it has sought to extract the wisdom by examining one class of case—departmental spending that has gone wrong. However, best practice can be found in a wider universe—in looking at what has gone right, whether in departments, the private sector or abroad.

In conclusion, both parts of the Bill are worthy of support. In particular, the OBR can provide a valuable and hitherto absent degree of external challenge and so avoid the self-congratulatory tone of much of recent policy-making. We must also put an end to the cherry-picking used by the previous Government. It is ironic that when they wished to emphasise stability and growth, the cycle was written out of the script, but when they wanted to excuse the continuation of a current fiscal deficit, the cycle was miraculously reinvoked.