Budget Responsibility and National Audit Bill [HL]

Lord Myners Excerpts

Monday 6th December 2010 Grand Committee

[Lord Peston]

My Lords, noble Lords will be aware from my remarks last time in Committee that I would not have set up an OBR. I regard it as a waste of public money, to be perfectly honest, but I entirely accept that we are going to have an OBR, since the Government have a majority in the other place and in practice seem to have a majority in your Lordships’ House. Therefore, I entirely agree with my noble friend Lord Eatwell that, if we are going to have such a body, we might as well make it a better one, rather than a worse one. Therefore, we have a duty to scrutinise the proposed legislation and come up with a variety of suggestions, in the hope of persuading the Minister that we could make a better fist of it than the Government have done so far. There I echo the remarks of my noble friend.

On this group of amendments, I repeat something that I said last week. The OBR’s November economic and fiscal outlook report produced a series of forecasts that are not based on any recognisable or explicitly stated economic theory. This is forecasting without theory, which is slightly different from forecasting without a model, although the two are connected.

I have found it difficult to discover from the economic and fiscal outlook report what assumptions the OBR has made—and, presumably, will continue to make—about the way in which the economy works. The central issue as far as serious economics is concerned is whether it is assuming that the economy is a self-adjusting mechanism that will come to a full employment equilibrium—the kind of assumption that what I regard as obsolete economics used to make—or whether it is taking for granted, first, that the economy will not come to an equilibrium at all or, secondly, that there are multi-equilibriums and it does not know where the economy is going to go. Whatever the case, many believe that, wherever it settles, it is most unlikely to settle at anywhere recognisable as a place of full employment.

On a related matter about the facts and how seriously we should take the OBR forecasts as they are now, we have available, as the noble Lord, Lord Higgins, pointed out, the immensely helpful survey published by the Treasury of all the independent forecasts, to which I shall refer further on Report. I have analysed the independent forecasts statistically and it is interesting to note that, given the averages, standard deviations and the other statistical criteria, the forecasts of the OBR and the independent forecasters for 2010 and 2011 are much in step. However, it is extraordinarily interesting to note that the OBR forecast for 2012—that GDP will grow at 2.6 per cent per annum and will continue to grow at that kind of rate—is remarkably optimistic compared with the forecasts of the independent forecasters; it is statistically significantly different. The OBR has not discussed this matter, nor have outside commentators, but your Lordships—we shall return to this issue on Report—have to ask how the OBR has come up with this optimistic view.

There was a time when the Conservative Party believed in the free market—those days seem long gone—and would have taken it for granted that, as the independent forecasters overwhelmingly are in the business of making money from accurate forecasting, they have a tremendous incentive to forecast accurately. Therefore, if one had a choice, one’s normal inclination would be to say, “If you believe in the free market, you will choose the free market forecasts as opposed to the OBR’s forecasts”. We shall return later to the significant issue of the optimistic OBR forecast for 2012 against the rather more pessimistic forecasts of the independent forecasters.

There may be two good explanations for the difference: first, many of the independent forecasters do not look that far ahead and we may have a biased sample of what we get from the Treasury; and, secondly, the OBR may have more information—for example, it may be better advised on government policy—than the independent forecasters. I am not saying that necessarily the OBR is mistaken; I am saying that the difference is, from any analytical and statistical point of view, noteworthy.

[Lord Myners]

My Lords, I, too, speak in favour of the amendment tabled by the noble Lord, Lord Higgins. Unlike my noble friend Lord Peston, I am in favour of the OBR. However, I share with my noble friend some anxieties about whether we need another set of economic forecasts. We should warrant another set of forecasts, in particular if the Treasury is going to produce its own, only if those from the OBR prove to be better and more accurate than those produced by commercial forecasters and other bodies. Therefore, it is important that we are able to analyse the forecasts made by the OBR, in order to understand the logic behind them and the assumptions that have been employed. That can best be done—and the veracity, standing and confidence that we wish to have in the OBR supported—if the model used by the OBR is freely available for analysis by peers, commentators and parliamentarians.

I have one question for the Minister. He has advised us that HMT will continue to produce its own economic forecasts. However, he has criticised HMT’s forecasts on the grounds of their accuracy and the spin placed on them by politicians. If he believes that HMT was leant on by politicians, it would be interesting to hear some examples, because during my 18 months in government I saw no evidence of Treasury forecasts underlying government policy being influenced in any way by politicians. The Minister has also criticised the amount of content of HMT’s published forecasts, including the fact that HMT did not publish forecasts for unemployment. Will he confirm that in future HMT will publish a full and comprehensive set of its own economic forecasts, which will in particular include forecasts for employment and unemployment?

[Lord Sassoon]

My Lords, this discussion has been interesting because it confirms how much material the OBR has already published, in its economic and fiscal outlook and alongside it, which enables us to have a richer discussion than we might ever have had in the past. I am grateful that the noble Lord, Lord Peston, is nodding. We have made considerable strides. I do not want to rake over old ground, as the noble Lord, Lord Myners, provokes me into doing, but we must keep coming back to the point that he makes by implication—namely, that we have employment and other forecasts in the 150-page economic and fiscal outlook document. We have many pieces of data that we did not have before and we will continue to have them in future.

I hope that we all agree that there is a huge amount of additional transparency. We have fan charts and all sorts of other things that make clear the basis on which the forecasts have been produced. These forecasts are in no way made or influenced by Ministers or their political advisers. I think that we all agree that transparency is at the root of what we are trying to achieve.

The amendments in this group seek to ensure that the OBR publishes the assumptions, economic analysis, data, methods and costings that it uses to compile its reports. We believe that that is absolutely achieved in the design of the structure that we have put forward. The OBR will have a statutory duty to act transparently. Chapter 4.8 of the charter states that,

“the OBR is to act openly, setting out with clarity the assumptions and judgements that underpin its work. It should proactively seek to make available its analysis”.

Thus the general duty is in the Bill, which is backed up by the wording of the charter that expands on it.

We now have evidence from last Monday’s document and the surrounding publications of the OBR about how it will do this in practice. Perhaps noble Lords have looked at the 20 Excel spreadsheets on the OBR’s website. I suggest that these give convenient access to the forecast data in a way that has not remotely been done before. In addition to those spreadsheets, over 20 separate documents with supplementary information have been published by the OBR since August.

One of the tests of whether this meets the legitimate demands of the most sophisticated external forecasting bodies is what the Institute for Fiscal Studies noted earlier this year, which is that the OBR had by that stage already published more detail than ever before on the assumptions underlying its forecasts and on the impact that changes in those assumptions would have on revenues and spending. We have made a significant step change. A lot of the information is available in electronic form. The construct of the Bill plus the charter achieves what we all want from this.

I turn to the specific points raised, particularly by my noble friend. The OBR has complete discretion over the model that it uses and what methods go around the modelling. In its recent economic and fiscal outlook report, the OBR had already made some adjustments to the methods that it used in June, so it is moving the way in which it has adopted the Treasury model. The Treasury will continue to retain economic and fiscal forecasting expertise because ultimately Ministers need to be supported by a forecasting capability. That will include the possibility of the Treasury continuing to use its own model, but the official forecasts will be those of the OBR.

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[Lord Eatwell]

I do not quite follow that. If the Treasury is going to disagree, or at least have the capability of disagreeing, with a forecast put forward by the OBR, how can it do that other than on the basis of a forecast of its own? I note that the word “published” was slipped into the Minister’s final sentence. Surely if the Treasury is going to have the capability of assessing and disagreeing with the OBR model, it must have some forecast of its own.

[Lord Myners]

Perhaps I, too, may make a comment. I took the Minister’s reply to the question asked by the noble Baroness, Lady Browning, about situations where there is a difference between HMT’s forecast and the OBR’s forecast as confirming that the Treasury will be clear about the fact that its own forecast was different and that its policy decisions were informed by its own forecast rather than by that of the OBR.

[Lord Higgins]

I find this rather difficult. The Minister raises his eyebrows. I simply do not understand what the purpose of this forecast is going to be. Perhaps I may expand on that for a moment. We had an official forecast and we presume that the Government will operate on that basis, but apparently there is to be an internal forecast on which Ministers will base their decisions. The noble Lord is shaking his head.

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[Lord Higgins]

My Lords, I understand the argument of the noble Lord, Lord Burns, and I should like to think further about what has been said on this issue.

Perhaps I may raise a further point in relation to the model. Over the past 80 or 90 years, we have had a huge difference of view as to whether one should adopt a Keynesian or a monetarist approach to these problems. My impression is that the OBR now has an essentially Keynesian approach and that the monetary aspect does not appear in the discussion at all, other than to say, “Well, of course, the Bank of England is targeting inflation”, and let it go at that. However, as I have previously pointed out to the noble Lord, Lord Myners, and others, until we got into quantitative easing the Bank was concerned purely about the price of money—the rate of a single rate of interest—rather than the quantity of money.

I am not the least bit clear about the proposal as it now comes here and to what extent the OBR is taking monetary factors into account. Let me illustrate this by giving an example from many years ago. I am delighted to see that the basic approach to economic forecasting on page 28 is to decide on how much excess capacity there is and then to see to what extent aggregate demand gradually increases and absorbs that excess capacity. That was precisely the policy that we adopted in 1970 under the Heath Government. We said then, in the clearest terms, exactly what is being said now on page 28. Unfortunately, this was misinterpreted as a dash for growth and we were absolutely pilloried by those who said that the money supply had been going up very fast. In fact there was a big difference between the money supply, the money supply figures and what was happening to aggregate demand. The point that I am seeking to make is that this does not take into account the effect of quantitative easing, for example, or, if it does, I am not clear where that would appear in these forecasts, although no doubt the Minister can enlighten us.

Given that we are told that the Bank of England is going to make yet a third, quite different, forecast in addition to the, I am almost inclined to say, surreptitious one in the Treasury—I accept fully the point made by the noble Lord, Lord Burns—I am worried that the fiscal and monetary side is not sufficiently integrated in the forecasts.

[Lord Myners]

Further forecasts on the economy are made in government. I believe that the Department for Business also produces its own economic forecasts. Almost as many forecasts are produced in government as are produced in the private sector.

The noble Lord, Lord Higgins, makes an important point. This might not be the right forum in which to discuss this, but the balance of intent behind the decisions currently being made by the Monetary Policy Committee is more focused on the words that come after “and subject to that” in its remit than on controlling inflation—that is to say that, in an environment in which fiscal policy is reducing demand in the economy, the onus for sustaining demand is coming from monetary policy, with considerable risk, in my judgment, of inflation.

There is no recognition in the Keynesian thinking of this document about the importance of monetary policy. We have what the Americans call a saltwater analysis of economics rather than the freshwater or Chicago school analysis associated with the monetarist view. It will be interesting to hear the Minister’s view on where monetary policy comes into the OBR’s thinking.

[Baroness Noakes]

But not today.

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[Lord Sassoon]

I would need to go back to the Treasury website, but I believe that in among all the supplementary documents there is a commentary. That is on the website, but I do not have with me the suite of documents which back up the big document. However, I believe that the material is set out in the supplementary documents. I would be happy to send the noble Lord a reference for where to find it.

[Lord Myners]

Before we rush away to look for this information on the website, let me say this: the noble Lord is a Minister within the Treasury and shares a floor with the Chancellor of the Exchequer, so no doubt he can give us some sense of how this scrutiny operated. I am trying to imagine in my mind’s eye the 12 or so employees of the OBR scrutinising annually managed expenditure. I am trying to imagine how they would look at the AME of the Department for Culture, Media and Sport, let alone its subdivisions, or the AME of the Department for Work and Pensions. Can the Minister at least give us a flavour of how that work was conducted? That would whet our appetites before we see the full information on the website, as he has assured us we can.

[Lord Sassoon]

As the noble Lord knows very well, if he would like to ask the question, I will pass it on to Mr Chote and his colleagues who, I am sure, would be happy to answer on how they carried out those parts of their remit. It is for them to say how they carried out their remit, and if the question has not been answered satisfactorily by the information already published on the website, I am sure that they would be happy to respond to further questions. Again, I offer my services as post boy, if the noble Lord would like me to pass on the question.

[Lord Myners]

I am not sure that the answer is entirely satisfactory. The Chancellor described this as an audit. He went beyond the language used by the OBR. We are asking the Minister of the Crown, based in the Treasury, to give us a sense of how this scrutiny was conducted. I am beginning to feel that the Minister does not know the answer. If that is the case, it would be helpful if he said, “I have no idea how this was scrutinised”, after which the Committee could form its own view.

[Baroness Noakes]

My Lords, the Opposition are getting overexcited this afternoon. The small phrase in the announcement made by my right honourable friend the Chancellor that there has been an audit of the AME savings is being considerably overinterpreted. As my noble friend suggested, it would be helpful if Mr Robert Chote were asked to say how he conducts this aspect of his work. I am sure that if there are then further questions that noble Lords wish to raise, they will be able to. It would be helpful if my noble friend references any material that is already publicly available. However, it is not reasonable to go beyond that this afternoon.

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Moved by

[Lord Myners]

28: Clause 4, page 2, line 32, at end insert—
“( ) There is a duty on the Office to comment on the completeness, balance and accuracy of major economic statements made to Parliament by the Treasury, particularly the Budget.”

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[Lord Myners]

My Lords, in many ways the points that I want to make here have already been made by my noble friend Lord Barnett regarding an earlier amendment, and I run the risk of being accused by the Minister of, in his term, raking over the coals again. The key issue here, though, is to ensure that Mr Robert Chote and his two fine colleagues on the committee of the Office for Budget Responsibility are not put in a place where their words are taken to be saying more than they actually do.

As noble Lords know, I continue to express support for the creation of the OBR and of the appointment of Mr Chote and his two colleagues. I also commend the Government for the steps that they have taken to ensure that there is an independent process around appointments to the committee of the OBR. I regard the document published last week as being a significant improvement in financial governance in the country.

It is therefore perhaps somewhat churlish to say, “This is all very good but perhaps we should have a little more”, but there was one thing missing last week in the Chancellor’s Statement to another place. He put a lot of spin, to use tabloid language, on the OBR statement. He is not the first Chancellor to do that; his predecessor but one was particularly prone at times of the Budget and the Pre-Budget Report to putting spin on information contained in the Budget—indeed, to the point of often forgetting to mention things that were in the Budget which were subsequently regarded as being very important. I would not want to see the OBR used in the same way.

The purpose of my amendment is to seek to ensure that, when the report of the committee of the Office for Budget Responsibility is produced for Parliament by the Chancellor or by a Treasury Minister, there is a reasonable test of the completeness and the accuracy with which the report is described to Parliament. As the noble Lord, Lord Barnett, has already indicated, the report last week is replete with language about uncertainties, such as fan charts and the use of terminology to suggest probabilities and risks around central forecasting.

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[Lord Sassoon]

My Lords, the noble Lord, Lord Myners, accused himself of being churlish. The noble Lord, Lord Burns, accused him merely of creating mischief. I offer no view, but agree completely with the noble Lord, Lord Burns, and with my noble friend Lord Newby, that his amendment would widen the OBR’s remit into completely inappropriate and vastly different territory from that covered by the Bill. The very focused remit in the Bill covers forecasts and the sustainability of the fiscal position. I noted that the noble Lord, Lord Myners, talked about the OBR commenting on the presentation of its report by the Chancellor—which would be difficult, for the reasons given by the noble Lord, Lord Burns—but his amendment goes much wider and is concerned with commenting on major economic statements, which covers a huge range of things well beyond the OBR's focus. I come back to the concerns that were expressed by noble Lords at Second Reading about the critical importance of the impartiality of the OBR. For example, the noble Lord, Lord Eatwell, said:

“I am sure it is right that the OBR should not become embroiled in political controversy”.—[Official Report, 8/11/10; cols. 16-17.]

That is exactly where the amendment of the noble Lord, Lord Myners, would take it—well beyond the sustainability of the public finances, which should be its remit. I ask him to withdraw his amendment.

[Lord Myners]

My Lords, far be it from me to wish to cause mischief. I have listened with great interest to the contributions of the noble Lords, Lord Newby and Lord Burns, and of the Minister. The Minister is correct that the wording of my amendment is very wide—wider than the OBR itself. However, I have often found it helpful in life to start wide, listen to the wise comments of others and narrow down. The noble Lord, Lord Newby, suggested that the word “balance” was capable of widely differing definitions, which would raise issues of implementation, and that possibly the phrase “absence of bias” might be better. I will reflect on that before Report. For the time being, I beg leave to withdraw the amendment.

Amendment 28 withdrawn.