Budget Responsibility and National Audit Bill [HL]

Baroness Noakes Excerpts

Monday 6th December 2010 Grand Committee

[Baroness Browning]

My earlier question came from reading the evidence of Professor Wren-Lewis to the Select Committee. He considered that if,

“the Treasury decides that the OBR model is wrong in some sense, I think basically then it is up to the Treasury to decide whether it wants to move to an alternative model or an alternative way of doing things whereby it produces its own forecast and does not rely on the OBR”.

I understand that the Government accepted that when they responded to the Treasury Committee. That was what prompted my earlier question.

[Baroness Noakes]

Perhaps I may suggest to my noble friend that much of the debate in Committee has been concerned with establishing that the OBR is properly independent of the Treasury. One of the corollaries of having an OBR that is properly independent and that we are all jolly keen to see in a separate building, with staff who are not too intertwined with the Treasury, is that the Treasury will have given away the ability to make some its own appraisals of the economic position. Clearly, it cannot leave itself completely denuded. It would be frankly ludicrous if, in setting up the OBR as a completely independent body to inform the public debate and to be the official forecaster, as my noble friend the Minister has repeatedly said, we left the Treasury with no internal capability to judge for itself whether or not it was happy with what was coming out of the OBR. It would therefore be entirely logical for the Treasury to retain some forecasting capability. In extremis, the Treasury may wish to rest its judgments on its internal forecasts, rather than those produced by the independent OBR, but even without those extreme conditions the Treasury will need to be satisfied that what is coming from the OBR is fit for the purpose of decision-making.

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[Lord Myners]

Further forecasts on the economy are made in government. I believe that the Department for Business also produces its own economic forecasts. Almost as many forecasts are produced in government as are produced in the private sector.

The noble Lord, Lord Higgins, makes an important point. This might not be the right forum in which to discuss this, but the balance of intent behind the decisions currently being made by the Monetary Policy Committee is more focused on the words that come after “and subject to that” in its remit than on controlling inflation—that is to say that, in an environment in which fiscal policy is reducing demand in the economy, the onus for sustaining demand is coming from monetary policy, with considerable risk, in my judgment, of inflation.

There is no recognition in the Keynesian thinking of this document about the importance of monetary policy. We have what the Americans call a saltwater analysis of economics rather than the freshwater or Chicago school analysis associated with the monetarist view. It will be interesting to hear the Minister’s view on where monetary policy comes into the OBR’s thinking.

[Baroness Noakes]

But not today.

[Lord Sassoon]

I love it when noble Lords preface their remarks by saying, “This may not be the place in which to discuss these things”, and then go into freshwater and saltwater fishing. The noble Lord, Lord Eatwell, has already said that his study of the 20 spreadsheets has raised some questions that he will address directly to Mr Chote. If my noble friend Lord Higgins would like me to relay his questions to Mr Chote, I will be happy to do so—or he may wish to write directly. Either way, I will return to the amendment. We have so much transparency already that it is provoking lots of questions that I am sure Mr Chote and his colleagues will be happy to answer. I will be happy to act as postman if that would be helpful.

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[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 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.

[Lord Sassoon]

My Lords, I am confused by this, because there are certain other things that I would have thought it would be impossible for the OBR to miss out, such as focusing its forecasts on government economic policies. Where there was a strong wish to put certain things into the Bill that were not there, now it is being said that it is blindingly obvious that the OBR would assess its own performance, so no provision is needed. What goes in the Bill and what does not are matters of judgment. It is my view that this is a sufficiently important matter to justify being included. The noble Lord, Lord Peston, will no doubt be comforted by that, because he has already played back to me the fact that the OBR has stated in its document, Analysis of Past Forecasting Performance, that it is,

“fully committed to transparency, and each year will produce a full and detailed report analysing the accuracy of its economy and fiscal forecasts, and explaining the differences between forecast and outturn”.

It goes on to talk about giving further detail on its forecast methodologies. The office is going to do this anyway and I would like to think that it would be done without the Bill requiring it. However, it is sufficiently important that there should be absolutely no doubting the fact that it will be done.

This is not something that of itself is easy to do. The analysis of forecasting requires fiscal forecasting skills that are in scarce supply. To make the assessment requires access to and full understanding of the data. Critical to the whole process is that actually doing the assessment yourself makes it a learning experience. That goes to the heart of why Mr Chote and his team will do it anyway. We certainly expect to see the OBR doing this and the office has said that it will. However, in the Government’s view the requirement should be on the face of the Bill. In the absence of a discussion that we have not yet had about alternative approaches, I suggest that this is where we need to leave it. For the moment, therefore, I ask the noble Lord to withdraw his amendment.

[Lord Eatwell]

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

[Baroness Noakes]

It should.

[Lord Eatwell]

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

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[Baroness Noakes]

My Lords, the noble Lord, Lord Barnett, has gone a bit over the top in describing Mr Chote and his colleagues as being “used”. The Statement made by my right honourable friend the Chancellor, to which the noble Lord referred, spoke of an audit of the annual managed expenditure savings. It was not an audit of anything other than one part of the totality of the package that my right honourable friend announced last month. The noble Lord has extrapolated from a relatively small use of the word “audit” into something much bigger that is not justified.

I agree, in a sense, that people such as myself, my noble friend the Minister and the noble Lord, Lord Barnett, who have an accounting background, tend to think that the term “audit” is reserved for this statutory audit function, has a very specific meaning and applies only to the audit of financial statements. However, the term means only “independent examination”, and in that sense I do not see any reason why the figure should not be used.

However, I say to the noble Lord that even when considering the audit of annual financial statements, those statements contain loads of assumptions and forecasts. To do an impairment review, you have to forecast cash flows for 10 years and choose discount rates and things such as that to calculate the figure that you put on your balance sheet. For your pension liabilities, you have to do even more complex calculations involving even more assumptions about the future. So even “audit” has to deal with these difficult areas of future estimation, even within the concept of statutory audit.

It would be helpful if the Treasury were to be reminded that the term “audit” has a rather technical meaning; it would be better to say something like “has independently examined”. Perhaps the Minister could take back to the Treasury that its lexicon could have that amendment added. I come back to my basic point, though, that the noble Lord, Lord Barnett, has gone a little over the top on this amendment.

[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.

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[Lord Myners]

I am not sure that the answer is entirely satisfactory. The Chancellor described this as an audit. He went beyond the language used by the OBR. We are asking the Minister of the Crown, based in the Treasury, to give us a sense of how this scrutiny was conducted. I am beginning to feel that the Minister does not know the answer. If that is the case, it would be helpful if he said, “I have no idea how this was scrutinised”, after which the Committee could form its own view.

[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.