Budget Responsibility and National Audit Bill [Lords]

William Bain Excerpts

Monday 14th February 2011 Commons Chamber

[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?

--- Later in debate ---

[Mr Bain]

I am grateful for that intervention, because it gives me the opportunity to compare and contrast the public sector net debt of 1996-97, which was 42.5%, with that of 2007-08, before the financial crisis—

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order. I am trying to allow some freedom, but we are in danger of straying off Second Reading and on to a general debate about the economy. Can we please come back to the debate in hand?

[Mr Bain]

I am very grateful for that guidance, Mr Deputy Speaker.

To conclude my response to the hon. Gentleman, public sector net debt in 2007-08 was 36.5%, so it was lower than that which we inherited when we came to office.

The analysis of the IFS, in chapter 2 of its green budget, produces the conclusion:

“The financial crisis and associated recession have reduced revenues and, to a greater extent, increased public spending as a share of national income. Without action, there would have been an unsustainable increase in borrowing and debt. The government’s spending cuts and tax rises are forecast to be sufficient to return the UK’s public finances to a sustainable position, but the same would have been true under the fiscal consolidation plan set out by Labour in its March 2010 Budget.”

I doubt that even Government Members would label the IFS a deficit denier, so a fiscal mandate that pays insufficient attention to the impact of higher growth and employment in bringing the public finances back to stability will fail the needs of the country.

We look forward to scrutinising the Bill in Committee, to improving the operation of the OBR and perhaps, during the Bill’s proceedings, to securing the change in fiscal mandate that would improve the economic prospects of the British people.

--- Later in debate ---

[Alec Shelbrooke]

I am most grateful for my hon. Friend’s intervention, which makes my point. If the OBR had been there in the past, it would not have been possible to proceed with the bunker mentality that I mentioned. Alternatively, the Chancellor could still have moved forward with the same forecast, but everybody would have known exactly where the blame lay and got rid of the arguments that we hear time and again whenever we talk about the horrific financial mess that this country is in—the chorus from Labour Members saying, “It’s the banks, it’s the banks.”

[Mr Bain]

It is!

[Alec Shelbrooke]

My point is proved by that sedentary intervention. Labour Members think that the whole financial crisis is down to the banks.

There is no doubt that the banks contributed to the global recession, but there is equally no doubt that this country was one of the worst placed countries in being able to deal with the downturn. Let us not forget what a structural deficit is. Again, I see Opposition Members shaking their heads, completely in denial of the fact that this country was living way beyond its means. One does not rack up a £1 trillion debt in the good times if one is acting sensibly. While £120 million a day in interest is going to foreign nations, we see councils around the country, especially Labour-run councils, cutting front-line services that impact on the public and trying to blame the Government, yet never mentioning what we could have done with that £120 million a day. We have to get a grip on the economy.

I want to return to the OBR, because I am conscious, Mr Deputy Speaker, that you have been trying to keep the debate on track. Let us consider the name of this body —the Office for Budget Responsibility. “Responsibility” is a word that has been lacking in the governance of this country and its fiscal policy, not only in the Treasury but, as we recently learned from senior civil servants, in other Departments that lost control of spending. We in this House have to be responsible and move things forward.