Budget Responsibility and National Audit Bill [Lords]

Sajid Javid Excerpts

Monday 14th February 2011 Commons Chamber

[Justine Greening]

I have just defined that flexibility. Although we want to balance the structural current deficit by the end of the rolling five-year forecast period, we are, as I have said, on track to meet the mandate one year early. We are clearly ensuring that we will achieve our overall objectives. By the end of the current Parliament we will have completely eliminated the structural current deficit, and the debt ratio will be falling. That is our four-year plan for restoring order and stability to our nation’s finances, which has been praised by the international community and welcomed by the financial markets.

[Sajid Javid (Bromsgrove) (Con)]

The Minister refers to praise from the international community. If she was referring to the International Monetary Fund, I welcome that praise. She will also be aware that the IMF’s independent evaluation office reported last week that it had felt intimidated and bullied by the Treasury in which the current shadow Chancellor, the right hon. Member for Morley and Outwood (Ed Balls), and the Leader of the Opposition played a key role between 2004 and 2006, and that it had been forced to water down its criticism of United Kingdom fiscal policy. Will she reassure the House that, as the IMF has praised this Government’s plans for the OBR, it seems that we did not intimidate it as the last Government did?

[Justine Greening]

I hope that we will have an altogether more constructive relationship with the IMF. In fact, it has already commented on the background to the need for this Bill. In November last year, it stated that the recent crisis led the UK to suspend its two national fiscal rules—the golden rule and the sustainable investment rule—at the end of 2008, and that the credibility of the national rules as effective constraints of policy action was weakened well before the crisis. It went on to say that the rules failed to prevent a worsening of the fiscal balance in the years leading up to the crisis, leaving insufficient buffers as the economy entered the downturn, and that while in place the golden rule was often criticised becauseit provided insufficient monitoring, transparency and accountability of fiscal policy. That was the IMF’s assessment of the previous fiscal mandate, and I think that it demonstrates clearly why it was so ineffective in tackling the problems that our country experienced. In many respects, it provided the ground on which those problems were able to prosper and grow.

--- Later in debate ---

[Ms Eagle]

It is important to see what the forecasts are and what they mean at this stage of economic recovery. Of course I want to see the economy recover and grow, unemployment coming down and inflation being controlled. Unfortunately, that is not what the signs that we have been picking up since the Government’s decision to cut so deep and so fast tell us about the real economy. We will see as time goes on how the OBR adjusts its forecasts to take account of the monthly and quarterly statistics from the Office for National Statistics.

The shock GDP figures before Christmas strongly imply that the Chancellor will suffer the embarrassment of his growth forecasts being downgraded by the OBR in his self-proclaimed Budget for growth, which is due to be unveiled next month. We will wait and see.

We on the Labour Benches support a genuinely independent OBR but, as I said, we will explore in Committee the practical extent of that independence and suggest amendments to the Bill to shore it up a little more. We will need to explore the viability of the arrangements to produce, rather than comment on, the fiscal forecasts, as many other fiscal councils do. We will need to explore the extent of the OBR’s remit and whether the close co-operation with civil servants required to produce the forecast will lead to behind-the-scenes negotiations that will compromise at least the perception of independence.

Let us be under no illusion that the existence of the OBR, which we support in principle, can in any way protect us from the misjudgments of the present Chancellor or any other. The OBR must assume, as the Minister said, that the Government’s plans are a given. It cannot comment on the fiscal mandate or on wider fiscal policy in general. It is prevented from doing so. All it can do is calculate the probability of the Government being able to achieve their stated plans. The OBR therefore cannot protect the country from the mistakes that the Chancellor makes, or from the mistakes that he has made already. It is no panacea and it should not be regarded as one. Our dispute—

[Sajid Javid]

Will the hon. Lady give way?

[Ms Eagle]

No, because I am about to finish. Our dispute is with the Government’s plans, not with the OBR’s forecasting. We look forward to closer examination of the Bill in Committee. We will subject it to detailed scrutiny.

--- Later in debate ---

[Sajid Javid]

My hon. Friend will note that in her closing remarks the hon. Member for Wallasey (Ms Eagle) told the House not to see the OBR as a panacea. Did he notice the irony of that statement, because it was the previous Government who passed the Fiscal Responsibility Act 2010 and presented that as a panacea to the nation, pretending that it is possible to legislate and bring down the deficit without taking any tough decisions?

[Mr Field]

I do not want to go too far into the past, but my hon. Friend is absolutely right. We now recognise the hubristic foolishness of the notion of ending boom and bust and that the economic cycle had somehow been put to one side. We have all now learned that lesson, and this generation of Members will be much more sceptical about any such panacea that is proposed in future.

As I have said, no organisation, not even those without links to the Government, forecast the scale of the economic crisis. Ultimately, economic forecasts are just that, and if we place blind faith in the independent projections, potential risks might also be ignored. Therefore, part of the OBR’s continuing role must be constantly to remind us all of its own fallibility and advise on a range of possible outcomes, pointing out not only to politicians, but to financial markets, the longer-term threats to our economy in the event that the markets, in particular, prove too forgiving.

Putting aside those concerns, which are relatively minor in comparison with the entirety of what we are trying to achieve, there is a great deal to welcome, particularly with regard to transparency and accountability. Furthermore, if the OBR works as it should, it is likely that any unofficial tinkering by the Treasury will be flagged up early and properly scrutinised by Parliament, returning some long-lost gravitas to the Treasury Committee and to Parliament itself.

As I have said in this House before, the restoration of confidence to our economy was always going to depend largely on rebuilding trust. The establishment of the OBR marks an important milestone in encouraging us to place our faith once again in the financial and political systems of our nation. We must of course be alert to the potential pitfalls in its operation, but it also represents an important check against a hitherto unchecked Treasury, and as such the OBR must now be treated as a credible new fixture in this fresh financial landscape.

[Mr William Bain (Glasgow North East) (Lab)]

It is a pleasure to speak in this debate. In giving the Bill’s proposals qualified support, Opposition Members view the creation of the OBR as part of the direction of reform started by the previous Government, with the creation of the Monetary Policy Committee of the Bank of England to decide on monetary policy and the establishment of the Office for National Statistics. The International Monetary Fund has said that the OBR’s proposed mandate is

“broadly consistent with established best practice for independent fiscal councils.”

Placing the Office for Budget Responsibility on a statutory basis is an important stage both in its development and in securing its greater independence from the Treasury, but Opposition Members will continue to scrutinise the Bill’s provisions closely to ensure that the OBR is as genuinely independent from the Government as it can be, and sufficiently accountable to the House.

It would be unacceptable if the OBR’s independence were compromised by insufficient access to its own resources, or if it were subject to excessive intervention by the Treasury. The OBR is due to receive £1.75 million per year in funding until the end of the current spending review period, but higher than expected CPI inflation might see that financial support fall in real terms. The Institute for Fiscal Studies recommends, on page 56 of its green budget, that

“the OBR should be as transparent as possible about what meetings have been held, and when and how all key assumptions made in its forecasts were decided upon”.

Internationally, it has been established that fiscal councils can undertake four main roles in connection with economic policy: first, provide objective macro-economic forecasts on which Government budget proposals can be based, as carried out by the Centraal Planbureau—CPB—in the Netherlands and by the Economic Council in Denmark; secondly, cost various Government policy initiatives, as performed by the Congressional Budget Office in the United States, the CPB in the Netherlands and the Parliamentary Budget Office in Canada; thirdly, evaluate whether fiscal policy is likely to meet its medium-term targets, as the Fiscal Council does in Hungary; and fourthly, analyse the long-term sustainability of fiscal policy, with examples being the CPB in the Netherlands, the CBO in the US, the Government Debt Committee in Austria, the Fiscal Council in Hungary and the Fiscal Policy Council in Sweden.

Of those functions, the OBR appears to cover only the first and third. Fiscal councils are less likely to engage in normative analysis of economic policy; only the Austrian Government Debt Committee, the Danish Economic Council and the Swedish Fiscal Policy Council appear to carry out that role.

The OBR’s role includes responsibility for preparing the Government’s economic and fiscal forecasts and issuing them alongside fiscal forecasts with the Budget. That is clearly helpful to the Government, but it means that Ministers are able to prepare in detail for any consequences of a Budget before the OBR makes its assessments public. Without safeguards, that could lead to concerns about the extent of private consultations between Ministers and the OBR prior to publication—the perceived problem during the release of unemployment data last summer.

As Lars Calmfors, chair of the Swedish Fiscal Policy Council, wrote in The Guardian on 28 July last year:

“It might be better if the OBR provided a post-evaluation of the budget as an input into the work of parliament (in addition to a forecast before the budget).”

The IFS also concludes in its green budget that there is a case for the OBR

“to take as much advantage as possible of the required end-of-year fiscal report to conduct and communicate detailed analysis of how and why outcomes deviated from the forecast.”

As my hon. Friend the Member for Wallasey (Ms Eagle) said, there are also questions about the use of different forecasts by the Treasury, the OBR and the Bank of England. The Bank already produces macro-economic forecasts. As the IFS again concludes:

“Those produced by the OBR will be used when deciding fiscal policy, while those produced by the Bank of England will be used by the MPC”—

the Monetary Policy Committee—

“when deciding on monetary policy.”

That might lead to a situation in which fiscal and monetary policy is not sufficiently well co-ordinated.

On fiscal forecasts, progress has been made to underline the OBR’s independence in reaching its conclusions, but it needs to make as much data as possible, as well as the details of its financial models, available to the public. In evidence to the Treasury Committee recently, Professor Tim Besley recommended that the OBR should be able to communicate with key international bodies such as the International Monetary Fund, the EU and the OECD.

The OBR’s mandate will not in itself generate higher growth, and that brings us to the proposed charter of fiscal responsibility to be created through clause 1. The aim of the charter as stated is to create

“objectives in relation to fiscal policy and policy for the management of the National Debt,”

and to establish the Government’s “fiscal mandate”. Opposition Members have no problems with that concept; indeed this House legislated for similar goals in the Fiscal Responsibility Act 2010, but the real difficulty is with the Government’s proposed fiscal mandate of attempting to eliminate the deficit over a four-year period—and the effects that that is already having, as the country can see, on growth.

The OBR has already revised down its growth forecast for 2011, from 2.6% when the Government took office last May to 2.3% after the emergency Budget in June; and it did so once more, to 2.1%, after the comprehensive spending review in November. We will see on 23 March whether those figures have to be downgraded again in the light of growing evidence that the Government’s decisions on the economy have seen it take a turn for the worse this winter.

When Labour left office, the recovery was picking up, with growth of 1.1% in the second quarter of 2010, and, according the OBR’s own analysis, the deficit for 2009-10 came in more than £20 billion lower than forecast. The Office for National Statistics was clear that, even once the effects of December’s inclement weather were taken into account, there would have been no growth at all in the last quarter of 2010.

The Government should adopt a fiscal mandate in the Bill to put jobs and growth first in order to ensure that cutting the deficit does not harm the productive capacity of the economy, and they should end their complacent argument that the economy is “out of the danger zone”. With the country facing 20% youth unemployment, rising prices and stagnant growth, that is not a claim that either the Prime Minister or the Chancellor can credibly make.

[Sajid Javid]

The hon. Gentleman will know that Government debt stands at £1 trillion. According to a recent ONS report, if we add on the bank debt that the country inherited from the previous Government’s policies, we find that the figure is about £2.3 trillion—equal to 160% of GDP. Does he consider that to be a good legacy with which to engender growth?