Budget Responsibility and National Audit Bill [HL]

Lord Turnbull Excerpts

Monday 8th November 2010 Lords Chamber

[Lord Turnbull]

My Lords, several justifications have been given to the budget responsibility half of this Bill. Originally there was talk of a fiscal policy committee as a mirror to the Monetary Policy Committee, but it soon became apparent that fiscal policy is quite different from monetary policy. The interest rate required to achieve a given rate of inflation is largely a technical issue, but the question of the size of the budget deficit and how the burden is shared between one generation and the next is political, as is the issue of the extent and distribution of public services. The fiscal policy mandate, therefore, must remain with the Chancellor of the day.

The current Chancellor has spoken of the need to prevent the Chancellor of the Exchequer from “fiddling the figures”. I do not think that that is an adequate explanation or that there is a true forecast but the Chancellor knowingly presents a false one. All forecasts are judgments, although some may be more plausible than others. The main problem is wishful thinking and a lack of objectivity about one’s own work—being judge and jury in one’s own cause. The problem has existed for a very long time and has affected some exalted people. We find it in chapter 1, verse 31, of the Book of Genesis:

“God saw everything that he had made and behold it was very good”.

A son of the manse might have been familiar with that.

To continue the religious theme, the previous Government were believers in the doctrine of what Stephanie Flanders of the BBC called the “immaculate recession”, in that it had no preceding boom and everything was on track and on trend until the world financial crisis hit us out of the blue. We must ask ourselves how it came about that after 60 quarters of consecutive positive growth—after boom and bust had been eliminated—we entered the recession with a structural deficit. Despite supposed adherence to the golden rule, there had been a cyclically adjusted current deficit in each of the six years to 2007-08. Public expenditure had been growing significantly faster than GDP, while the tax to pay for it stayed flat as a proportion of GDP.

We can now see that at least two errors were embedded in the fiscal policy of this period. It was claimed that the underlying rate of growth of GDP was 2.75 per cent per annum. That has now been revised down by OBR to around 2.25 per cent. Many observers believe that it could have been lower even before the recession. Had this more cautious rate been embedded in the public sector finances, as page 21 of this year’s Red Book explains, it would imply that the structural position of the public finances was worse than estimated at the time.

The second error was in assuming that a number of sources of revenue were sustainable, but the VAT receipts from credit-fuelled consumption, the various receipts from an overheated property market and the taxes levied on bank profits have all proved exaggerated. That point was acknowledged on page 201 off the April Budget document. In my view, all this makes a powerful case for introducing a greater degree of challenge and independent scrutiny into the fiscal framework. While it is true that, unlike monetary policy, the final decisions on the Budget will still rest with the Chancellor of the Exchequer, the political cost of departing from the OBR’s forecast is greatly raised.

Just as central bank independence was the big idea of the 1990s, greater scrutiny by independent financial councils is the current new idea, urged by both the IMF and the EU. It is ironic that this Government find themselves adopting a proposal supported by the EU, although the difference is that we want to construct our own mechanism rather than be subject to the scrutiny of the Commission or other member states.

Another benefit from the creation of the OBR relates to the fact that, even if the fiscal projections are basically sound, a number of tricks can be played in the presentation of the details: judicious choice of time periods, splicing different time periods together or switching between different definitions. In part, it will fall to the Statistics Commission to put an end to these and point them out, but the OBR can help by presenting its analysis on a consistent basis.

Like many others, I believe that the OBR is an idea whose time has come, but what about the detailed structure that is being proposed? In short, I believe that the Treasury Select Committee and the Government have broadly come to the right conclusion. I wonder whether the noble Lord, Lord Eatwell, considers that the Bank of England would pass the tests that he has set. After all, the Chancellor sets its mandate, chooses the members of the MPC and prescribes the mechanisms for accountability.

Some have argued that the OBR should be entirely independent of the Treasury, with its own staff, its own models and its own premises—this is what one might call the self-sufficiency model. The problem with that is what Sir Alan Budd has called “harvest time”: in certain months of the year around PBR and the Budget, it is all hands to the pump. Maybe 200 people are involved in preparing Budget forecasts, including experts on the North Sea, social security benefits or EU finances. At other times, they go back to their other duties. If these resources were transferred, the Treasury would need to recreate them for its own policy development work.

At the other end of the spectrum was what may be called the validation model—all staff stay in the Treasury but none of their work can be published unless it has been validated by the OBR. I was initially attracted to this but I believe that the Treasury Select Committee and the Government have correctly concluded that it would not carry conviction. What is proposed is a pragmatic and, in my view, well judged hybrid, with a core of around 20 staff being transferred but the work of all people involved in the Budget being validated.

The Treasury Select Committee proposed a non-ministerial department. The Treasury has responded by proposing a non-departmental public body. This is a distinction without a difference. The key issue at stake is the assurance that the OBR is adequately resourced and, if the funding coming from the Treasury is thought to be compromising its work, the chair is free to raise the matter with the Select Committee.

The real choice is between an OBR that is on the executive side of the fence and one that is an emanation of Parliament, like the NAO. Both the Treasury Select Committee and the Government have opted for the former, which I believe is right. The OBR is not just a commentator or expert auditor. It has an executive function: it supplies the Treasury with the basis for its projections. Another safety valve in the Bill, which I think should be supported, is the provision for two or three non-executives. Their role, I think, is to protect the OBR’s independence, to sort out tensions between the OBR and the Treasury and possibly to ensure that the chair of the OBR does not go off on an ego trip. I support both the structure and operating model that have been devised, but we have to recognise that these arrangements are experimental and, whether or not a review is provided by statute, we should certainly revisit the design in a few years’ time.

The other half of the Bill relates to the NAO, on which there is really only one issue, which is to provide that the C&AG should serve a single 10-year term. This prevents a repetition of what I consider to be gross mismanagement by the Public Accounts Commission in allowing the last C&AG to serve for 20 years, which was far too long. It was always ridiculous for the NAO to be urging best corporate practice and governance on departments while failing to practise it itself.

The new NAO leadership has an opportunity to develop the way in which the NAO operates. Historically, it has sought to extract the wisdom by examining one class of case—departmental spending that has gone wrong. However, best practice can be found in a wider universe—in looking at what has gone right, whether in departments, the private sector or abroad.

In conclusion, both parts of the Bill are worthy of support. In particular, the OBR can provide a valuable and hitherto absent degree of external challenge and so avoid the self-congratulatory tone of much of recent policy-making. We must also put an end to the cherry-picking used by the previous Government. It is ironic that when they wished to emphasise stability and growth, the cycle was written out of the script, but when they wanted to excuse the continuation of a current fiscal deficit, the cycle was miraculously reinvoked.