Office for Budget Responsibility

John Howell Excerpts

Tuesday 24th July 2018 Westminster Hall

[Luke Graham]

I agree, and I will go into more detail later on exactly how I propose the powers should be extended and how to move forward.

The OBR provides sustainability and balance sheet analysis, which assesses the long-term sustainability of the public finances. The OBR’s “Fiscal sustainability report” sets out long-term projections for different categories of spending, revenue and financial transactions, and assesses whether they imply a sustainable path for public sector debt. That has arguably been a particularly important metric as we have sought to make the public finances more manageable and sustainable after the financial crash in 2008. There was a kick there aimed at the last Labour Government, but I will resist that for now.

The “Fiscal sustainability report” also analyses the public sector’s balance sheet, using both conventional national accounts measures and the whole of Government accounts, prepared using commercial accounting principles. Since 2016, the “Fiscal sustainability report” has been published once every two years, reflecting the frequency with which the Office for National Statistics updates its population projections.

The OBR evaluates fiscal risks every two years by publishing a comprehensive review of the risks from the economy and financial system in its “Fiscal risks report”. The first was published in July 2017, and the OBR analysed tax revenues, public spending and the balance sheet and included a fiscal stress test. Furthermore, the OBR produces central forecasts and projections for the public finances, while the “Economic and fiscal outlook” and the “Fiscal sustainability report” include discussion of the risks—both upside and downside—to those forecasts and projections.

The whole of Government accounts provide further information on specific fiscal risks, notably contingent liabilities such as Government guarantees, and that is in the “Fiscal sustainability report”. As a member of the Public Accounts Committee, I have the joy of taking part in, and leading on, the inquiry into the whole of Government accounts. The Committee recognised the fine work of the Departments and the civil servants that pull together those accounts, which really are of a very high standard and are certainly world leading.

[John Howell (Henley) (Con)]

One recent OBR report is about probably the biggest challenge that we as a country face—our ageing population and the associated social and healthcare risks. I found that report very useful. Does my hon. Friend think that such activity is a good use of the OBR?

[Luke Graham]

I do. That kind of objective analysis from the OBR could help to inform and shape some of our public debate. It could certainly make sure that policy debates in the House are informed by substantive, objective figures that would hopefully have cross-party support.

Finally, the OBR is responsible for scrutinising the Government’s tax and welfare policy costings, which it does at each Budget. The Government provide draft costings in the run-up to each statement, which are subjected to detailed scrutiny and challenge. The OBR also states in each “Economic and fiscal outlook” report and in the “Policy costings” document whether it endorses the Government’s published costings as reasonable central estimates and whether it would use them in its forecast. It also gives each costing an uncertainty rating, based on the data underpinning it, the complexity of the modelling involved and the possible behavioural impact of the policy.

Those five major roles all focus on the UK-wide public finances. However, the Government have also asked the OBR to forecast the receipts from taxes that they have devolved—or intend to devolve—to the devolved Administrations. It is therefore clear that the OBR already has an extensive remit, with a great deal of responsibilities, not only to deliver information to the Government, but to ensure accuracy so that that information is reliable enough that the Government can make acceptable fiscal decisions.

On the earlier point about the OBR’s performance, it has forecast, on average, within 0.3% accuracy of actual economic growth over the past seven years. While the exact accuracy in any given year has of course varied, the OBR has, to its credit, sustained an accurate reporting standard over a significant period of time. If anything, it has slightly underestimated economic growth in its predictions, showing a propensity for conservative estimates, which does it much credit. Indeed, the one outlier in its predictions is from 2013. For that year, it predicted a slowing of growth, but, in fact, thanks to the Conservative-led coalition Government’s policies, we experienced a 2.1% growth rate. It is worth noting that, without that outlier, the OBR has achieved accuracy to 0.1% in its predictions. That is a sound endorsement of its expertise.

Why do I believe that we should extend the OBR’s powers? First, it is worth remembering that independent budgetary offices are well established and well respected in other countries. In the Netherlands, the Bureau for Economy Policy Analysis, the CPB, has been in place since 1945. It is fully independent; it has its own legal mandate and an independent executive and advisory committee. Research is carried out on the CPB’s own initiative or at the request of the Government, Parliament, individual Members of Parliament, national trade unions or employers’ federations. It analyses the effects of current and future Government policies, and it is responsible for producing quarterly economic forecasts, as well as a spring forecast and a macroeconomic outlook, which is published alongside that country’s Budget in September. Taken as a whole, those forecasts provide a basis for extended socioeconomic decision making in the Netherlands.

The CPB analyses policy proposals, but also evaluates the effects of policy measures that have already been implemented. Since the early 1950s, the bureau has been analysing the costs and benefits of large infrastructure projects. It also conducts research in a wide range of areas, including, but not exclusively, the economic effects of ageing, globalisation, healthcare, education, the financial crisis and the regulation of markets.

Since 1986, the CPB has offered political parties an analysis of the economic effects of the policy proposals in their election manifestos. The plans of the participating parties are analysed identically, which offers voters a comprehensive tool for comparison of the parties and contributes to the transparency of the election process.

However, it was during a visit by the Public Accounts Committee to our American counterparts earlier this year that the idea of expanding the OBR’s remit came to me. During the visit, we learned about the Congressional Budget Office—a similar independent fiscal advisory organisation—based in Congress, in Washington DC. The CBO was created by the Congressional Budget and Impoundment Control Act 1974 as a non-partisan agency that produces independent analysis of budgetary and economic issues to support the congressional budget process. Interestingly, the CBO was based on the Californian Legislative Analyst’s Office, which manages the state budget in a non-partisan manner. To this day, the CBO provides analysis for state and local government where congressional committees report on legislation that applies to those levels of government.

The CBO’s mission is to help Congress to make effective budget and economic policy. The CBO discharges a number of key responsibilities, and I want to examine a few of them in greater depth. First, in broad practical terms, each year the agency’s economists and budget analysts produce reports and hundreds of cost estimates for proposed legislation. The CBO does not make policy recommendations; its reports and other instruments, which summarise the methodology underlying the analysis, help to inform policy decisions and the debates that subsequently take place in Congress.

If we look a little deeper into that, we see that among the CBO’s statutory requirements is the production of certain reports, the best known of which is the annual “Budget and Economic Outlook”. That report includes the CBO’s baseline budgetary and economic projections. The CBO is also required by law to produce a formal cost estimate for nearly every Bill approved by a full committee of either the House of Representatives or the Senate. Those cost estimates are only advisory. They can, but do not have to, be used to enforce budgetary rules or targets. Moreover, the CBO does not enforce such budgetary rules, although its work informs them; the budget committees enforce the rules. The power still lies with the politicians, but they are making much more informed choices.

It is important to remember that it is Congress that sets the CBO’s priorities; it is not the President, either of the major political parties or the CBO itself. However, I understand from conversations with counterparts in the United States that the CBO has become more open to the majority and minority leadership—both sides—in the House of Representatives and the Senate putting forward proposals to or making requests of the CBO. The CBO follows processes specified in statute or developed by the agency in concert with the budget committees and the congressional leadership. The CBO’s chief responsibility under what is known as the Budget Act is to help the budget committees with the matters under their jurisdiction.

For the CBO to be able to provide analysis to the breadth of recipients described, its analysis must be objective, impartial and non-partisan. The CBO achieves that by refusing to make any policy recommendations and by hiring people on the basis of their expertise and without regard to political affiliation. Analysts are required to conduct objective analysis, regardless of their own personal views. Strict rules to prevent employees from having financial conflicts of interest and to limit their political activities are enforced. That is in line with the requirements for our own civil service.

Importantly, the reports by the CBO are designed to reflect the full range of experts’ views, as it is required to present the likely consequences of proposals being considered by Congress. By their nature, the estimates are uncertain, but the estimates provided are in the middle of the distribution of potential outcomes. The CBO also undertakes a range of dynamic modelling. It will look not just at the impact of one policy and assume ceteris paribus that the rest of the world is held constant; it will also look at the impact that that one variable will have on other policies, to provide a more complete scenario forecast and recommendations to the various committees.

--- Later in debate ---

[Luke Graham]

I do agree. As I have mentioned, a hallmark of the CBO is the high standard of staff it employs. That is based on their expertise and ensuring that the right people are hired for the right role and that training is maintained in the office as well, so that expertise is not lost with standard staff turnover.

The CBO maintains its objectivity through a rigorous system of checks and balances. All the CBO’s cost estimates and reports are reviewed internally for objectivity, analytical soundness, and clarity. That process involves many people at various levels in the agency. Analysts’ consultations with outside experts help them to hear all perspectives on an issue.

Furthermore, the CBO evolves as the needs of Congress evolve. It has remained true to its original mission, but, as legislation has grown more complex, it has found itself spending more time providing preliminary analysis and technical assistance during the drafting stage of laws. The CBO is being asked more often to prepare cost estimates for Bills that are heading for votes without being marked up by committees first.

I emphasise that the CBO is strictly non-partisan. It conducts objective, impartial analysis, and importantly that analysis is accepted among economists and, consequently, by both parties in Washington. The CBO has historically issued credible forecasts of the effects of both Democratic and Republican legislative proposals.

That brings me to the last thing that I want to propose for the OBR. It is crucial that the independence of the Congressional Budget Office is accepted and beyond reproach, because it monitors and marks the policies and proposals of not only the Government, but the opposition. The independence of the Office for Budget Responsibility is, I believe, beyond reproach, but it only monitors Government policies. The Budget Responsibility and National Audit Act 2011, which founded the OBR, states that where any UK Government policies are relevant to the performance of the OBR’s duty of examining and reporting on the sustainability of the public finances, the OBR

“may not consider what the effect of any alternative policies would be.”

That rules out analysing Opposition spending plans.

My proposal, therefore, is to extend the powers of the Office for Budget Responsibility to create a body that replicates the function of the CBO in the United States, providing independent analysis to hold spending commitments to account. The aim of my proposal is to extend the powers of the OBR, providing it with additional responsibility to assess, analyse and score every piece of legislation that goes through the Houses of Parliament for financial or fiscal impact. It will maintain its strict independence, making it acceptable on both sides of House, regardless of which party is in government.

The purpose of my proposal is to enable the OBR to provide independent information and analysis, in order to combat “fake news” and misinformation being circulated on Government and Opposition spending plans. Wild spending commitments have been made, particularly by Opposition parties in the past, for example over the abolition of tuition fees, with no responsibility to deliver while out of office and, therefore, no accountability.

Let us look at the Brexit debate. How much better could the debate have been had there been an independent body, such as the OBR, providing accurate analysis of the impact of the costs and opportunities of Brexit? It would have taken the pressure off the Government and given us analysis that would be accepted by all parties. We could then have debated how to make the best of Brexit—or not—rather than the endless debates we have had over bus-side promises, scaremongering over power grabs or whether the Brexit deal was sufficiently hard, soft or anywhere in between.

[John Howell]

How does my hon. Friend think the OBR would have reported, if it had been given that role?

[Luke Graham]

I do not know whether I am sufficiently qualified to project on to the OBR the conclusion it might come to. I am sure it would have provided additional food for thought, to contribute to the debate.

As I have already mentioned, other countries have long-established and well respected independent fiscal bodies, which provide analysis that is respected and accepted across the political spectrum. That allows the politicians to debate the substantive matter, not subjective opinion. Establishing an independent system of accountability will hold manifesto commitments to account before an election, making fiscal sustainability a manifesto premium, and negating the opposition’s ability to garner support through unsustainable spending commitments. In turn, this will allow us, as politicians, to focus our debates on the content and direction of our proposals without having to waste time debating the credibility of the figures.

This is not the first time that this proposal has been suggested. In March 2014, Robert Chote, the chairman of the OBR, recommended to the Treasury Committee in a hearing that opposition party policies should be costed by the OBR, in order to improve the quality of public debate. Mr Chote was confident that it was within the OBR’s capabilities, although not in its current remit, to review party manifestos for a general election, so long as the parties could agree the terms of reference. During that Treasury Committee hearing, Mr Chote said that he supported

“the OBR having a role in the costing of political parties’ manifestos in the run-up to an election”.

He said:

“if Parliament wishes us to go down this route then it does offer the prospect of improving the quality of policy development for individual parties and it potentially improves the quality of public debate”.

The then shadow Chancellor, Ed Balls, wrote to Mr Chote, asking the OBR to assess the Opposition’s manifesto pledges, while Danny Alexander of the Lib Dems—then Chief Secretary to the Treasury—also supported the proposal.

The New Statesman, hardly known as a Conservative party mouthpiece, wrote in 2015:

“Successful fiscal councils overseas demonstrate the need to balance responsibility with credibility. The Dutch CPB is an established part of the political landscape and plays an instrumental role in setting budgets and evaluating manifesto pledges. In the US, the Congressional Budget Office assesses alternative policy options for the government. The credibility of these institutions has been built over decades…evaluating manifestos should be the beginning of the OBR’s expanding set of responsibilities, not the end.”

Each piece of legislation put before the House, would, therefore, be scored, costed, and subjected to objective analysis and scenario planning, so that politicians can have a more informed debate. That would give us greater focus on smaller initiatives, many of which are announced in the House and passed within one news cycle. It would give us a better understanding of not only central Government funding, but devolved Government spending, so that we would always be clear about Barnett formula consequences and what direct funding is given to the different levels of devolved Administration throughout the United Kingdom. Finally, it would give us a more comprehensive view of our economic and fiscal outlook, so that politicians could have a more informed debate, hopefully leading to better decision-making.

There is something of a credibility crisis in politics just now. The public feel they cannot and do not trust politicians and the promises we make. That is why we should provide an independent, verified and reliable source for the figures we use in debates, one which all sides can agree on. The OBR already exists and has respect and esteem as an independent assessor of the Government, so why not extend that remit to cover all parties regardless of whether they are in Government or Opposition? There is clearly cross-party support for the proposal, as seen in my submission to the Backbench Business Committee. It would be a small but important step on the path back towards believability and reliability in our politics.