Budget Responsibility and National Audit Bill [HL]

Lord Eatwell Excerpts

Monday 8th November 2010 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the Minister for his introduction to the Bill. I shall begin by referring to the second part of the Bill, which deals with the revised arrangements for the re-establishment of the NAO and its relationship with the Comptroller and Auditor-General. I am assured by the Treasury Bill team that, apart from minor drafting changes, this is the same Bill as that introduced by the last Government and lost at the end of the last Parliament. I can therefore begin this afternoon by congratulating the Government on having recognised the wisdom of the Labour Government’s proposals. I may have some small amendments to propose later, when I have had the opportunity to examine the Bill in more detail, but for the moment, with that part of the Bill, I am content.

I turn to the real novelty before us: the proposed legislation to establish an independent OBR. We on these Benches regard the idea of an independent Office for Budget Responsibility as a very good idea—perhaps the only good idea that the Government have had so far. We are therefore totally committed to ensuring that the legislation establishing the office is robust and fit for the purpose of establishing an independent office that will become an enduring and credible part of this country’s policy-making apparatus. To that end we apply the following tests to the legislation: first, independence; secondly, credibility; and thirdly robustness—that is, are the structures in place sufficient to maintain independence and credibility among the political storms that will invariably assail the office from time to time?

First, on independence, the comparison of the legislation establishing the OBR with that re-establishing the National Audit Office, conveniently contained within the same Bill, reveals that the OBR’s independence is a pale shadow of the independence of the NAO; and, correspondingly, that the independence of the chair of the OBR is a pale shadow of the independence of the Comptroller and Auditor-General. For example, Clause 17(1) makes it clear that the Comptroller and Auditor-General,

“has complete discretion in the carrying out of the functions of that office”.

Clause 6(3), by contrast, requires that the OBR must,

“in the performance of its duty … act consistently with any guidance … in the Charter”,

as described in Clause 1 of the Bill—which, by the way, incorporates Clause 1(6), stating that that guidance may be modified at any time. Let us remember that this guidance is guidance by the employer, since all OBR funding comes from the Treasury. It is not casual suggestions by a disinterested party. So the guidance of the charter is fundamental to the status of the OBR. It qualifies virtually all the supposed freedom and independence of the organisation. So, when will the charter be available for scrutiny by your Lordships' House?

In the absence of the charter, let us examine Clause 1 more carefully. In Clause 1 we read that the charter will outline,

“the formulation and implementation of fiscal policy and policy for the management of the National Debt”.

Notable by its absence from the charter is any reference to the economic health of the nation—the level of unemployment, for example. It therefore fails to provide transparent guidance to the OBR concerning the performance of its duties, as set out in Clause 4, to provide fiscal and economic forecasts. Will the Minister tell the House whether the catch-all clause, Clause 1(3), which states:

“The Charter may contain … other material as the Treasury considers appropriate”,

will contain guidance as to the economic variables to be included, or, perhaps even more important, those variables to be excluded from the activities of the OBR?

More broadly, Clause 1 makes it clear that the guidance of the charter will ensure that all activities of the OBR will be those that “the Treasury considers appropriate”, save one. At only one point in this whole Bill are independent powers provided to the OBR—that is, in Clause 6(2), which states that,

“the Charter must not make any provision about the methods by which the Office is to make any such forecast, assessment or analysis”.

That is it; that is the only independent bit. I do not want to suggest that that method of forecasting is unimportant—of course it is important, and I shall return to it in a moment—but I am certain that the phrase “an independent Office for Budget Responsibility” might be expected, in the understanding of ordinary people, to mean much more than that. However, the OBR does not have freedom over what it is to study. It does not even have the freedom apparently suggested by Clause 5(2), which was quoted by the Minister and states:

“The Office must perform that duty objectively, transparently and impartially”.

You would think that that was clear. However, that clause is qualified by Clause 6(1)(b), which mandates the provision of guidance as to what subsections (2) and (3) of Clause 5 entail. So the Treasury has to provide guidance on what transparency entails, and even what impartiality means. That does not sound very independent to me. If I have misinterpreted these clauses, may I suggest that the Government amend them to place their interpretation beyond all reasonable doubt?

One element of the guidance that we on this side agree with is that in Clause 5(3), which seems to confine the activities of the OBR to consideration of the impact of government policies alone. I am sure it is right that the OBR should not become embroiled in political controversy. However, will the Minister confirm that I have interpreted the clause correctly, because the clause qualifies the scope of the office’s consideration by the words:

“Where any Government policies are relevant … the Office may not consider what the effect of any alternative policies would be”?

I quite see that this may allow work on methodological issues or research into econometric technique, but what about circumstances in which the Government have no policy and hence the qualification no longer applies? Suppose, for example, that the Opposition put forward proposals to reduce the level of unemployment by means of schemes to be funded by the European Union. Could the OBR test these against a base-case scenario, as is the approach of the Congressional Budget Office in the United States? Or would it be prevented from doing so by Clause 5(3)? It is not at all clear. If the role of the OBR is to test government policies alone, why not say so explicitly?

Finally, on independence, paragraph 1(c) of Schedule 1 allows for the appointment of no fewer than two members of the office, who are not required to have,

“knowledge or experience likely to be relevant to the performance of the Office’s duty under Section 4”.

I suppose we should refer to these as non-executives. Schedule 2, on the other hand, establishes a National Audit Office with a majority of non-executives and a non-executive chairman. The NAO’s non-execs are appointed by the Public Accounts Committee and the OBR’s non-execs are appointed by the Chancellor of the Exchequer, so independence is eroded again. Moreover, the NAO’s non-execs have a clear responsibility, as set out in paragraph 10(2) of Schedule 2, to sustain the complete discretion of the Comptroller and Auditor-General. But a peculiarity of the OBR legislation is that it fails to place any responsibility on these non-execs, other than participating in the preparation of the annual report and in the audit. Since paragraph 12(3) of Schedule 1 explicitly excludes them from any role in the preparation of forecasts, what are these non-execs supposed to do? Make the tea? They certainly do not have the power to protect the independence of the OBR such as it is. Surely that should be the non-executives’ main role. The conclusion must be that this Bill neither establishes the independence of the OBR nor embodies procedures to protect the independence, save in one respect—the forecasting methods used by the committee.

Let us now turn to our second criterion, that of credibility. If the OBR were to be truly independent, as we on this side would wish, then it is inevitable that it will become a powerful brand. The access of the office to detailed government information, as described by the Minister, would make its reports the defining landmarks for those interested in economic and fiscal affairs—a very worthwhile achievement. As noble Lords may be aware, economic forecasting is a controversial discipline—an art not a science. Even widely used techniques do not command universal agreement or even respect. Forecasting models inevitably embody contentious theoretical assumptions, and econometric techniques are matters of often heated debate. It is therefore enormously important for the credibility of the OBR that its methods are subject to rigorous peer review and challenge.

The first component of this will be transparency. As already noted, the requirement of transparency is qualified by the provision of guidance as to what transparency actually means. However, some of my fears would be allayed if the Minister would guarantee that the data, methods and costings used in the preparation of forecasts will all be published simultaneously with those forecasts in readily accessible electronic form. This is necessary if there is to be informed review and challenge of the OBR's methods.

There should also be provision in the Bill for a peer review committee such as that provided in the structure of the US Congressional Budget Office. The peer review committee should be appointed by an independent person—perhaps the president of the Royal Economic Society—subject to the approval of the Treasury Committee in another place.

I turn finally to our third criterion: robustness. If the Bill were to establish a truly independent and credible OBR, future Governments would meddle with it at their peril. This is not a matter of the people involved. I have full confidence in the personal integrity and independence of Mr Robert Chote. I declare an interest as he is an active member of the Cambridge college of which I am master. However, the robustness of the OBR should not rest on personalities. That is why the severe limitations placed by the Bill on the OBR's independence, and the lack of any support for the credibility of its methods, indicate that the drafting fails the robustness test. Therefore the Bill fails all three of our tests. The OBR is not meaningfully independent, save in the methods that it uses—and those methods are not buttressed by the credibility of peer review. Failing those two tests, it is not robust.

I am prepared to accept that this outcome was not the Government's intention, and that the problems that I have identified are errors of drafting. If that is the case, I assure the Minister that I will be more than willing to work with him to produce a Bill that will establish an independent, credible and robust OBR. Of course, much of that work will be facilitated by sight of the proposed framework agreement between the Treasury and the OBR. Will the Minister confirm that such an agreement is being drafted, and will he tell me when I may have sight of it?

This part of the Bill is a failure. It need not be. I have a proposal to put to the noble Lord on behalf of my right honourable friend Alan Johnson, the shadow Chancellor. I propose that, at the end of Second Reading, the noble Lord, on behalf of the Government, should formally withdraw Clauses 1 to 10 of the Bill, and Schedule 1—that is, all material relating to the OBR. The Bill will then become the National Audit Bill, and will, I believe, receive support from all sides of both Houses. An all-party pre-legislative committee of both Houses should then be formed—or such all-party structure as the Government wish—to thrash out an independent, credible and robust structure for the Office for Budget Responsibility. This would be a major step toward increasing democratic accountability and transparency in our country. I hope that the Government will accept my right honourable friend's proposal.

[Lord Newby]

My Lords, I, too, welcome the Bill. When the proposal first came forward for the Office for Budget Responsibility, I regarded it as a gimmick. However, a number of things since then have persuaded me that I was wrong. First, when we discussed the statistics Bill several years ago, we discovered that only 17 per cent of the population believe any government statistics. Whether that is a rational view is irrelevant; the way in which politicians down the years manipulated official statistics left them with no credibility whatever. Therefore, a number of things needed to be done. Fortunately, the new structure of the Office for National Statistics is improving that figure, but it was a salutary reminder that, whereas we may take statistics seriously, politicians and Ministers have fallen so low in public regard that we are atypical.

Secondly, it became clear, not least from reading the book of the noble Lord, Lord Mandelson, that the previous Prime Minister and Chancellor believed that growth figures were a matter for political manipulation. It is absolutely clear that that is what Gordon Brown sought to do. This gives me another reason to believe that we have to take that power and oversight away from the Treasury. During Gordon Brown’s chancellorship, we had the delightful business of the golden rule and the way in which it was stretched, expanded and diminished to fit the requirements of the Chancellor. It is fascinating to hear the huge support of the noble Lord, Lord Eatwell, for these principles of independence. He shows all the zealotry of a convert. Certainly, while his party was in government, nothing was done to promote the principles that lie behind those parts of the Bill. That does not necessarily mean that his criticisms—

[Lord Eatwell]

My Lords, would the noble Lord like to make it clear that the independent structure of the Office for National Statistics was implemented by the Labour Government?

[Lord Newby]

My Lords, the structure was implemented by the Labour Government but, if it had not been for this House, the body would have been emasculated. The current structure is miles away from the feeble structure that came before your Lordships’ House. It required a cross-party coalition of former senior civil servants and Members from other parties to change virtually every aspect of that Bill, so that when it left your Lordships’ House it was almost unrecognisable. That is why the noble Lord is right to want to subject this Bill to careful scrutiny about whether it will achieve the aims that have been set for it.

Three areas deserve the scrutiny that the noble Lord has set out. It is important that the structure, the people and the role are right. First, the structure is slightly odd in some respects. The role of the chair and the way in which that person is appointed by a transparent appointment procedure obviously make sense. The other two members of the office are being scrutinised by the Treasury Select Committee and clearly must have relevant experience. Their roles are relatively clear, although it is not clear to me whether the Government envisage that these will be full-time or part-time roles. I find the context of the other non-executive directors strange in relation to this body and I am not sure what their role will be. I was slightly surprised by the use of the phrase “at least two”. If the chair decided that he would like half a dozen, would that be acceptable? More important, what role will they play? They will not be technical people, but much of the work of the office will be intensely technical. Will their role be to protect the independence of the office in some way and to proselytise about the role of the office? It would be helpful to have further clarification from the Minister on that.

Secondly, three positive aspects of the way in which the top people will be appointed will be crucial to the success of the body. First, they will be in place for five years, which is a long time. Secondly, unlike for members of the MPC, for example, the recruitment process will be open. It will not be a matter of the Chancellor ringing up someone on a Sunday evening and saying, “I’d like you to take this job and, by the way, I need to know by Monday morning”. Thirdly, the role of the Treasury Select Committee is important as regards the quality of the people involved. The Government have made a good start by their appointment of Robert Chote as the first chair of this body.

The third area where the noble Lord, Lord Eatwell, has demonstrated that there is room for further discussion is the remit and how it will work. I do not think that the word “independent” appears in the Bill, which is slightly surprising. There is some ambiguity about where the independence of the body starts and stops. We know from many other areas of public life that, if you give the Treasury an inch, its inclination is to take a mile. I look forward to discussions in Committee, where, I hope, we can clarify that slightly.

I do not think that the Government would be sensible to take up the generous offer of the noble Lord, Lord Eatwell, of a hugely long period of scrutiny on this. This body is of great significance and there has been a lot of public debate on it already. We have the opportunity in your Lordships’ House to debate all these technical issues carefully, as we always do, and so will those in another place. We need to get the formal infrastructure on to the statute book now, without further considerable delay. With those caveats, I am looking forward to the Committee stage and I support the Bill.

--- Later in debate ---

[Lord Sassoon]

My Lords, I have made it completely clear that there is no question of my making any criticism of officials. I am making criticisms of the previous structure in which Ministers were able—whether from wishful thinking or, as I say, from more sinister motives—to decide on the forecasts. That is why we need an independent body. I am conscious of the game that is played here—that I have to sit down after about 18 or 20 minutes. I will do my best to answer as many of the points as I can but if noble Lords want to interject, of course I will listen to them but I may not get through as much as I otherwise would and will have to write to noble Lords afterwards.

In answer to the question from my noble friend Lord Higgins and others about the desirability of having a draft of the charter for the House to see—absolutely, that is what I intend should happen. We are working to that end. Related to that in terms of what happens next, the OBR will publish forecasts before the end of the month which will bring its forecasts up to date to reflect the decisions announced in the comprehensive spending review.

As we think that this is the challenge that has been set, the Bill absolutely takes away the responsibility for determining the forecast from Ministers and gives it to independent experts. It needs to be a new independent body, rather than a case of just asking one of the fine existing forecasting houses. At the critical times of the year when the forecasts need to be produced, particularly at the time of the Budget, it is essential—as has been explained in different ways by the noble Lords, Lord Turnbull and Lord Burns—to have a close relationship. We need to have an independent body of the sort that we have designed, rather than just taking consensus forecasts after the event. I think that the House would be rightly outraged if we did not at the time of the Budget immediately have forecasts available.

Ministers will retain the responsibility for making policy and for the OBR to shine a light on the state of the public finances resulting from those policy decisions. I can therefore confirm that it is the intention that the OBR should remain outside politics and should not, for example, be asked to cost alternative policies, wherever they come from, including from opposition parties.

We have heard a wide range of questions about the design of the OBR. On independence, without dwelling on it, I do not think that the comparisons in any way with the NAO are right. These bodies have very different objectives and come from very different starting points. In answer to other points, the fact that they are put in the Bill together is a result of the fact that the NAO provisions are sufficiently important that we should bring them forward at the earliest possible date. As noble Lords will understand, legislative time is hard to come by. So, in terms of the trade-off between two Bills and finding a slot to bring forward important provisions of the NAO, we have taken the decision to put the two sets of provisions in the same Bill. However, that does not mean to imply in any way that we believe that there is a comparison to be made between the provisions for the two very different bodies.

I take to heart the words of the noble Lord, Lord Burns, who said that complete separation would not be appropriate and pointed to the quality of the people as being particularly critical to the way in which independence works. The OBR’s independence will be judged on the quality of its analysis and on the ongoing scrutiny by the public and by Parliament. Our provisions have been informed by the NAO report published on 22 June which examined the forecast prepared by the interim Office for Budget Responsibility for the emergency Budget. It set out a number of indicators of independence which have informed the design of the Bill. These are set out in Clause 5(1), which talks about “complete discretion”; Clause 6(2), which talks about independence and the method of analysis; Clause 9, which talks about the “right of access” and assistance to “Government information”; and paragraph 8 of Schedule 1, which talks about staff being appointed by the OBR. The latter point was made a number of times. There are other matters not strictly in the Bill—“physical location”, for example, which has already been addressed by the OBR, and questions of funding, which can be raised directly with the Treasury Select Committee.

It was asked whether it could be argued that the OBR is independent when it is clearly working for the Government in its remit. I would describe the words “complete discretion” as the critical key here, and refer to the Bill preventing the Treasury from specifying the methods of the OBR’s analysis.

There was then a question about why the word “independence” did not appear in the Bill. Not only does the term “complete discretion” encapsulate what is intended by independence in this case but the same wording is used to empower the Comptroller and Auditor-General and the NAO, and nobody questions their independence.

[Lord Eatwell]

My Lords, before the noble Lord leaves the issue of independence, I wonder whether he can help me. Clause 5(2) states very clearly:

“The Office must perform that duty objectively, transparently and impartially”.

Everyone must applaud that wording. But then Clause 6(1) states clearly:

“The Charter for Budget Responsibility may include guidance to the Office about how it should perform its duty under section 4, including (in particular) guidance about … what subsections (2) and (3) of section 5 entail”.

So, is there to be guidance about what impartiality entails?

[Lord Sassoon]

My Lords, rather than discuss the primacy of the wording in Clause 5(2) in the abstract, it will be easier to return to these matters when we see the draft wording. I can, however, assure the noble Lord that the words in Clause 5(2), to which he rightly draws attention, are the keystone here.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am conscious of the time and of the conventions of this House. I have explained at some length—but clearly not with sufficient clarity for the noble Lord, Lord Myners—that guidance will be given. That does not override in any way or compromise the three critical tests set out in Clause 5. I do not for one minute think that it should be necessary to get into questions of interpretation in the courts or anywhere else.

[Lord Eatwell]

At the end of my speech I made a formal offer of co-operation on behalf of the Official Opposition. I would be grateful if the Minister would respond to that offer.

[Lord Sassoon]

My Lords, in my next sentence I was about to say that I will of course respond to the challenge from the noble Lord, Lord Eatwell, which was repeated by the noble Lord, Lord Tunnicliffe. I am sorry to disappoint the noble Lord, Lord Eatwell, if he thought that I was building up to a grand conclusion where I would propose to withdraw the clauses in Part 1.

We have had an interesting debate. I will reflect on a number of points and I have endeavoured to answer as many as possible. Nevertheless, the tone of the debate from the majority of speakers this afternoon confirms to me that we are absolutely on the right track, generally, and that we should press ahead. There has already been considerable scrutiny of and discussion about the OBR over the past few months. I look forward to the continued scrutiny by noble Lords as the Bill wends its way through subsequent stages, and I ask the House to give the Bill a Second Reading.

Bill read a second time and committed to a Grand Committee.