Budget Responsibility and National Audit Bill [HL]

Lord De Mauley Excerpts

Thursday 9th December 2010 Grand Committee

[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.

[Lord Eatwell]

I am grateful to the noble Lord. Perhaps I may take up a couple of the points to which he referred, as did the noble Lord, Lord Burns. First, there is the question of whether there would be enough people to do the job. The Treasury sends out a compendium of about 40 independent forecasts, so at least 40 independent forecasting organisations are doing this job. It seems to me that within those organisations, as well as within universities and research organisations such as the national institute, there is a sufficient pool of talent to draw on over the years to ensure that this job is well done.

Secondly, in suggesting that there should be a team of five, I was not recommending that they all commit themselves to do the job in any one year; rather, I was proposing that they act as a committee, perhaps assigning a couple of its members to do the job each year. The group of five would provide continuity over the piece.

There was then the question of how much the committee members should be paid. I should tell the noble Lord that academics, in particular, are so obsessive and competitive that they will do this in exchange for a good lunch. Given the amount that they are paid, they are not so well fed these days, and I do not think that there would be any difficulty in finding suitable people at a reasonable level of remuneration.

The key issue is bringing in external experts who are committed to doing the job. As I conceded in my opening speech, the transparency with which the OBR is to operate will attract outside commentators. What is needed is a group of people who have suitable expertise, in whom the Chancellor and the Select Committee of another place have confidence, and whose responsibility it would be to comment on the two major forecasts per year that the OBR is required under the Bill to make. However, I am heartened by the Minister’s response and look forward to further discussions on this matter. In the mean time, I beg leave to withdraw the amendment.