Budget Responsibility and National Audit Bill [HL]

Lord Burns Excerpts

Thursday 9th December 2010 Grand Committee

[Lord Eatwell]

My Lords, I hope we can have a fairly brief Committee today, not least because the annual contest between the universities of Oxford and Cambridge at Twickenham has just kicked off. This, however, is not a contest but an attempt to improve the Bill. In moving Amendment 40 and speaking to Amendment 43, I believe we can significantly improve it.

We have already discussed whether the OBR should write its own school report, as the noble Baroness, Lady Noakes, referred to it. There was general agreement around the House that that was a bad idea. In proposing this amendment I have, as I am sure Ministers and officials have, examined procedures in equivalent organisations in other jurisdictions. The most relevant of these is the US Congressional Budget Office, although there are significant differences between the two organisations. The CBO is answerable to Congress, whereas the OBR is a creature of the Executive. This has been the source of many of our difficulties in constructing a framework of independence. None the less, we have something valuable to learn from the CBO, which uses clear and extensive peer review. As I am sure the Minister is aware, the CBO is scrutinised by a large and very distinguished peer review committee of, I think, about 20 people. Nothing so large is necessary for the rather more limited activities of the OBR. None the less, independent peer review will undoubtedly be valuable. It will not only add to the intellectual input to the activities of the OBR—undoubtedly a positive factor—but act as a further buttress to independence. The peer review committee of the Congressional Budget Office publishes its findings on the CBO website, enhancing the transparency of the entire process.

We have already discussed the need for the past forecasts of the OBR to be assessed by some independent authority. That independent authority could be the peer review committee proposed in Amendment 40 to the Bill and Amendment 43 to the schedule, although there could be other ways of doing it. Amendment 40 provides the peer review committee with clear and unambiguous terms of reference. It must report on,

“the accuracy of fiscal and economic forecasts prepared by the Office, including the appropriateness of the methods employed”.

This is a clear technical remit; the committee would not be allowed to stray into the realms of policy.

Amendment 43 provides some detail on the appointment of the peer review committee. Again, I have looked at the practice of the Congressional Budget Office, where many of the members of the peer review committee are nominated by the council of the American Economic Association. I have suggested that the ideal body to recommend to the Chancellor persons of appropriate technical expertise would be the equivalent professional body here in the UK—the council of the Royal Economic Society. Otherwise, appointment will be by the Chancellor, with the approval of the Treasury Select Committee of another place.

It might be argued that the process of peer review will take place anyway in the context of vigorous debate among economists and econometricians over forecasting and policy. However, I submit that without a dedicated peer review committee this debate, which will take place anyway, will tend to be unfocused. The particular value of the peer review committee is to have a group of very well qualified professionals who see it as their responsibility to examine the results and the methods of the OBR. As I suggested, there may be other ways of achieving this objective, but I believe that an independent review of the OBR’s record and methodology will add tremendous value to the process and help to buttress the independence of the OBR, which is something that we all seek. I beg to move.

[Lord Burns]

My Lords, I have a lot of sympathy with the idea of having independent reviews of forecasts and the methods employed at some intervals during the process. My concern is whether the amendment makes too much of a meal of the issue. It is important to have an appropriate way of appointing an independent person or persons to undertake this work. My preference would be to give this job to the non-executive directors of the OBR. That seems a perfectly respectable way to do this. It is common practice in companies that the independent directors should appoint auditors and should look after other forms of oversight.

I cannot believe that a group of five people is needed to undertake this task, which, as the amendment says, is to evaluate forecasts and to look at the methods used. If we are not careful, we will have the same problem as we have had with the MPC—quite soon, one runs out of qualified people to fill a committee.

I also have concerns about whether an independent review is needed every year. Not a lot will change each year. We will have one year’s figures in the forecasts and we will be able to look at the outturns. When one is looking at issues relating to bias and variables, one typically needs a run of years to be able to see the pattern of the forecasting record. The Bill suggests that there should be an annual review, but to me the issue is how often one needs independent input into this process. I would be cautious about that. It is a task that one could leave to the non-executive directors, who would decide whether, for example, an independent review was needed every year or whether internal and independent reviews should be held in alternate years. I would leave it to the independent directors, or members of the office, to determine the number of people needed for these investigations, who to recruit and whether to recruit the same people on successive occasions.

I support the idea of independent input, but let us not make a meal of it. The task is on a different scale from that in the US example that the noble Lord, Lord Eatwell, cited. We need something of a size that is appropriate to the task in hand.

[Lord De Mauley]

My Lords, I am grateful to the noble Lord, Lord Eatwell, and his noble friends for their amendment and to the noble Lord, Lord Burns, for his contribution. The Government recognise the importance of external expert challenge, which is the issue that the noble Lords have raised. Indeed, the fact that the OBR analysis is publicly available means that it is open to scrutiny.

On a previous occasion, we debated whether the OBR should produce an assessment of forecast accuracy. This process needs expertise in forecasting, which the OBR clearly has. The Government argue that this expertise will be difficult, although not impossible, to find elsewhere. It also requires a full understanding of the data underpinning the forecasts. Again, the OBR has this, and a similar level of knowledge is scarce elsewhere, although, I acknowledge, not unobtainable.

Assessing previous performance provides a very valuable opportunity for the OBR to learn and understand what has driven diversions from accuracy. It is clear that it is the OBR’s intention to use the report in this way and that it has the right skill set to do so. The noble Lord, Lord Eatwell, mentioned the Congressional Budget Office. I understand that, although it does indeed have a panel of external advisers who meet twice a year, the CBO carries out its own analysis of previous forecasts. I think that our proposed design is in line with discussions with international organisations.

The proposals in the amendment raise a number of issues that we need to consider. The Government, for example, believe it is difficult to envisage that the committee could get into the detail needed to produce a comprehensive and meaningful assessment. Like the noble Lord, Lord Burns, we share the concerns about a body of five people being needed to scrutinise this work. We are not sure whether the noble Lord envisages that they would be paid and, if so, how much. We also feel that there is an issue of focus and that it might be appropriate to look at a larger section of the OBR’s work, because perhaps all parts of its work could benefit from external expertise.

In general, in a broader context there is nothing to stop any person or organisation assessing the OBR’s forecast accuracy by looking at its forecasts and comparing them with the actual outturn data. Where value can be added is in making sure that the OBR uses all the best information. That is why we put an emphasis on transparency across the piece. None the less, we accept that bringing in external expertise could be very useful. We believe that it is consistent with the Bill as drafted but that it is important to take a more proportionate approach. Of course, the OBR already has the power to convene advisory panels to provide external perspectives if it sees fit, and Robert Chote indicated his interest in that in his evidence to the Treasury Select Committee. The OBR is already drawing on external expertise, as noted in its autumn forecast statement.

In conclusion, the Government will reflect on whether additional steps are needed in the light of this very helpful debate and suggestion. In particular, I am interested in the suggestion of the noble Lord, Lord Burns, which I should like to take away and think about.