Budget Responsibility Bill

Lord Eatwell Excerpts

2nd reading & Committee negatived & 3rd reading
Monday 9th September 2024 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, the OBR was created by George Osborne to

“remove the temptation to fiddle the figures”.

An entirely non-political evaluation of major fiscal measures was certainly a good idea; unfortunately, it has not yet been achieved. The failure to attain political independence may be attributed to two elements that are not dealt with in the Bill yet are essential to its purpose.

First, key inputs to the OBR’s work are the estimates of future spending provided by the Government. We now know that these can be politically manipulated to ensure that fiscal targets seem to be met. As the Institute for Government commented at the time of the Conservative Budget this Spring,

“the figures that Hunt announced … are based on entirely fictitious future spending plans”.

Since the election, we have learned that not only were the Conservatives fiddling the figures that they provided to the OBR, but they were concealing spending plans too. In the light of post-election findings, Mr Hughes confirmed that the OBR was made aware of the extent of pressures on departmental budgets only in late July. Happily, the Financial Secretary has just outlined the measures that are to be taken to verify the data supplied by the Government. These measures are most welcome.

The second key political element undermining the value of the OBR’s current assessments is the current formulation of the charter. The current charter embodies three targets that the OBR is required to assess; unfortunately, none of them is based on sound economics.

First, there is the objective to have public sector net debt—excluding the Bank of England—as a percentage of GDP falling by the fifth year of the rolling forecast period. As the noble Lord on the Opposition Front Bench just pointed out, this means that whenever the Bank of England sells part of its stock of government debt to the private sector, it automatically tightens the noose around government spending. An important part of monetary policy has damaging consequences for fiscal policy—how foolish is that?

More importantly, the objective treats all government expenditure as having the same economic relevance. A crazy unfunded tax cut is assigned the same economic impact as investment in industrial infrastructure. As the Chancellor of the Exchequer argued in her Mais Lecture while still the shadow Chancellor,

“our fiscal rules differ from the government’s. Their borrowing rule, which targets the overall deficit rather than the current deficit, creates a clear incentive to cut investment that will have long-run benefits … I reject that approach”.

Unfortunately, the next objective, to ensure that public sector net borrowing does not exceed 3% of GDP by the fifth year of the rolling forecast period, is simply a dynamic version of the first objective and is, therefore, subject to the same rejection that the Chancellor has made.

The third and final objective is to ensure that expenditure on welfare is contained within a predetermined cap. One of the important operational aspects of economic policy is the value of the automatic stabilisers in the economy: when the economy booms, welfare spending automatically goes down; in a slump, welfare spending automatically goes up. The notion of a cap would emasculate the automatic stabilisers—again, a silly thing to do.

In short, none of the current objectives in the charter makes sound economic sense. It forces the OBR to make forecasts that are simply not relevant for the Government’s stability and growth objectives. It is imperative that the charter is revised prior to the Budget on 30 October. Given the requirement that revisions of the charter must be presented to Parliament 28 days before coming into effect, will the Minister tell us whether we can expect a revised charter to be presented before 1 October?

To conclude, the OBR is a very good idea, as is this Bill, but major operational aspects need urgent correction. I look forward to hearing from the Financial Secretary how these deficiencies are to be dealt with.