Financial Services Bill

Lord Burns Excerpts

Tuesday 26th June 2012 Lords Chamber

[Lord Burns]

My Lords, I agree with the noble Baroness, Lady Liddell, that the Bank of England needs a modern and transparent form of governance, the best governance that it can have. I also agree with the noble Lord, Lord Flight, that the form of governance that is best known in this country and is best practice is a unitary board—a board that consists of a majority of non-executive directors. It also consists of executive directors with a non-executive chairman. The present structure of the court seems to me very close to that. We may not like its name, but in terms of structure, it seems it could very easily be turned into such a body. The issue is not what its name is or even the composition of it; it is to do with the powers that the court has.

It has been mentioned that the court has many of the powers that a normal board would be expected to have. Some of those powers that it does not practise at present are contained in the amendment that the noble Lord, Lord Sassoon, will move later today to do with dealing with issues of oversight of policy in the past and the extent to which that should be done.

I would hope that we could retain the present structure of the court. As I said, whether the name should be changed is a matter of taste, but we should concentrate on the powers of that court and the extent to which the powers that it needs to operate as a normal board are contained in some of the other amendments being put forward. Certainly, as I interpret some of those that we have seen already, it begins to come quite close to what I would expect to be a modern, transparent and very good form of governance.

[Lord Sassoon]

My Lords, it has been an interesting 45 minutes. I really thought that this group of amendments was going to be, in cricketing terms, a loosener from the opening fast bowler from the Opposition Benches, instead of which I have been faced with a number of bouncers and, I dare say, a couple of wide balls on the way through.

I will not respond to all of what I might term the Second Reading points that have been reiterated. I answered all the substantive points at Second Reading and would refer noble Lords back to those debates. I also will not be tempted into discussing clauses yet to come. In answer to my noble friend Lord Eccles about what “micro” means—

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Looking at Amendments 5 and 10, when I was in the other place I had the privilege of being on the Treasury Select Committee for about six months under the outstanding chairmanship of the noble Lord, Lord McFall. What struck me about it was that, like many committees in the other place and here, it was not party partisan in the way it operated. We sometimes see in the United States that it infects its confirmation process. Here, we have perhaps achieved the situation where committees understand their responsibility both to Parliament and to the community at large. Therefore, to deny the opportunity for a democratic part of the House to have a proper say in the appointment of a figure so critical and the opportunity to bring what are often years of direct experience and observation to that moment of final selection is a real loss. We have within this group of amendments a real opportunity to change the democratic profile and the confidence and accountability with which the governor operates. We should seize these opportunities in this Bill.

[Lord Burns]

My Lords, I support Amendment 6 tabled by the noble Baroness, Lady Wheatcroft. As she said, in terms of strengthening the power of the court or the board of directors, whatever we are going to call it, giving the appropriate powers, respect and position to the non-executive chairman of that court would be a very important part of making it an effective functioning body.

I was Permanent Secretary at the Treasury in 1993 when Eddie George was appointed governor and Rupert Pennant-Rea deputy governor without any warning being given to any of the members of the Court of the Bank of England. It caused a great deal of upset among members of the court who felt that they had been undermined by the lack of warning. In a world where we are trying to build some good corporate, modern, transparent governance, as we have heard today, giving a role to the chairman of the court, at least in terms of informing him or consulting him, would be an important part of it.

With respect to the amendments covering the powers of the Treasury Select Committee, my noble friend Lord Turnbull has set out the analysis of that position. It would be wrong to underestimate the power of the Treasury Committee simply in terms of its ability to summon people and to question them. I regard the Treasury Committee—I have watched it for many years and I appeared before it many times—as a very skilled body in terms of oversight. It fulfilled its role in terms of challenge, questioning and advice. I would rather it did the job that way rather than by seeking to have vetoes over positions. It can make a huge impact simply by the way it brings people in, talks to them, summarises its opinions and then leaves it in the hands of Ministers to decide how far they wish to take account of those views and whether they really want to push it. At the point at which they want to push it, the points made by the noble Lord, Lord Turnbull, probably come into play.

I particularly agree with the noble Lord, Lord Peston. I cannot remember an occasion when the term of a Governor of the Bank of England was shortened other than by his own will. I would have thought that it would be an issue of some significance that would require not just the House of Commons but, as the noble Lord, Lord Peston, said, Parliament in general to agree it.

[Lord Flight]

My Lords, I also support the amendment tabled by the noble Baroness, Lady Wheatcroft, for essentially the reasons given by the noble Lord, Lord Burns, and as part of the process of restoring the court to being a proper board.

I want to comment on Amendment 5. I have mixed views, but I think it is quite healthy that someone being appointed to such an important role should be subject to vetting in the same sort of way that occurs typically in the United States and that it probably is the Treasury Select Committee that is equipped to handle that vetting.

If I may digress, the present Governor of the Bank of England studied economics at the same university as me at the same time, and anyone that knew that knew that the teaching of economics at that time at that university was appallingly bad. That illustrates that it takes some effort to assess the sort of mind that someone being appointed to that job has got. The absence of any form of politically accountable examination is probably wrong in today’s world. Therefore Amendment 5 is worthy of serious consideration.

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[Baroness Drake]

My Lords, perhaps I might ask the Minister a very brief question. Proposed new Section 3E(2) says:

“The Oversight Committee must … if or to the extent that the Bank accepts the recommendations, monitor the implementation of the recommendations”.

My question is very simple. If the Bank does not accept the recommendations, what then happens?

[Lord Burns]

My Lords, I, too, support the burden of this amendment. It is a subject that a lot of us spoke about during Second Reading, and this is an important part of strengthening the governance of the Bank of England, which we have been speaking about for much of the afternoon. The things set out here have the ability, over time, to change quite substantially the relationship between the non-executives and the executives at the Bank. I think we all agree that that will provide a better balance, given the wide-ranging powers that the Bank of England will have. The proposed new section sets out some of the important issues about making reviews of policy performance, which lie at the heart of this, and the engagement of the non-executive directors in what has been happening from a policy perspective within the Bank. The suggestions about publication and handling recommendations would also be extremely helpful.

The very same question raised by the noble Lords, Lord Flight and Lord Hodgson, also came to my mind. Why does one need a separate oversight committee for this, rather than handling it within the board itself? I have sat on a lot of boards by now and I have never found a problem with engaging with this kind of activity. Within a unitary board, people know the occasions when they must remain silent or absent themselves and who is in a position to do that. It is very much about commissioning reviews, as set out here. It is not as if one is suggesting that the directors themselves would be conducting the reviews, but they are going to be commissioning them, either from inside or outside the Bank.

It seems to me that the only argument arises from the scepticism that we have heard from many noble Lords about the entrenched position of the executives relative to the non-executives of today. Therefore I understand why the Government might think that this is a way of bringing confidence to this process. However, over the long term, I hope that it could be done within the remit of the board as a whole, because that gives confidence within a unitary board; confidence between the executives and non-executives that, together, they can review what has happened in the past and can learn the lessons of the past so that an attitude of confrontation does not develop between one set of people reviewing the performance of another set. However, I understand why it might be right at this point.

[Lord Phillips of Sudbury]

Is the noble Lord not assuaged in his point about the unitary board by the fact that it explicitly says here that the oversight committee is a sub-committee of the court?

[Lord Burns]

The committee consists only of the non-executive directors; the executive directors will be there, in a sense, only in attendance. It can work. Normally within a board, if it was doing this kind of review, it would be the non-executive directors who were in the lead and making the running. I have found from experience that one should do everything one can to keep the executive and non-executive directors together when one is handling these kinds of issues and trying to learn lessons from the past. We do not want a situation where one part of the board feels that it is being picked on by another. However, given the level of distrust that we have heard this afternoon from many noble Lords about this, I can understand the concerns that, if the Government had brought forward the proposal in the sense that a number of us suggested, they would have come up against the pressure of saying, “Well, it will simply be controlled by the executive directors, in the end, if it is done that way”. Over time, however, a well functioning board should be able to handle these kinds of policy reviews within the whole of the board. That is the best way of learning longer term lessons from these experiences.

[Lord Tugendhat]

My Lords, I agree with what the noble Lord, Lord Burns, has just said. This is an admirable amendment, and I agree with almost all of it. There is one point I am going to raise in a moment, but I do not see why it cannot be done by the court. The fact that the Government have gone to all this trouble to set up a committee instead of leaving it in the court means that one wonders what lies behind it. It seems to be diminishing the authority of the court in some peculiar way. I do not understand the purpose; if the court consists of the directors of the Bank, it seems very odd. That is one point. Otherwise, however, I agree with the thrust of this amendment.

I would like to point out to the Minister an inconsistency in his approach. In a couple of the previous amendments that we have discussed, he told us that what is being suggested is unnecessary, because, of course, the Government would behave in a proper fashion. They would consult everybody, including the chairman. There is no need to be specific in saying that the chairman should be consulted on the appointment of the governor. There was another occasion when the Minister said that there was no need to be specific. Yet here the Government say,

“If the person to be appointed to conduct a performance review is an officer or employee of the Bank, the appointment requires the consent of the Governor of the Bank”.

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[Lord Sassoon]

I think that is wrong. It is not the Court of Directors that becomes the oversight committee; the Court of Directors remains the Court of Directors. It is effectively the committee of non-executive directors, or NEDCo, of the Bank, which becomes the oversight committee. The court remains the court. So there may be some misunderstanding of who is doing what here, but the Court of Directors must indeed keep the procedures of the FPC under review, which will be principally done through the oversight committee, which is a committee of the court.

[Lord Burns]

The references here to the Court of Directors of the Bank in new Section 9B(1) says:

“There is to be a sub-committee of the court of directors of the Bank”.

When it says Court of Directors in that case does it mean the whole court? Earlier we were being told that “directors” simply means the non-executive directors and that the governors are not counted as being directors of the court. That seems to be part of the problem that is causing this ambiguity.

[Lord Sassoon]

Let me try again. The court of the Bank, which is the executives and non-executives, must keep the procedures under review. The non-executives through the oversight committee have a remit and function that includes procedures but goes wider and is able to review the performance of the Bank and the FPC against its objectives in the full wide way that I believe the noble Lord, Lord Eatwell, is asking for it to do—and I am confirming that it does.

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[Lord Burns]

For clarification, when it says the Court of Directors, does that mean the whole court or does it mean only the non-executives?

[Lord Sassoon]

Court means the whole court, and that is in relation to the procedures. The oversight committee has the function and ability to look not only at the procedures but also at the question of whether the objectives of the Bank and the FPC are being met.

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[Lord Hodgson of Astley Abbotts]

My Lords, I do not wish to upset the noble Lord, Lord McFall, or my noble friend Lord Flight, but I urge my noble friend to resist these amendments. If we look at the objectives of the Financial Policy Committee, it needs to be a pretty focused, pretty small body. Having 14 people, or 12 people, depending on which of those amendments one is addressing, seems not to lead to the operational focus and directness that this particular policy committee will need. Having four external members will give a perfectly adequate external perspective; more would be more likely to confuse than to illuminate.

[Lord Burns]

I argued at Second Reading that it would be very useful if we were able to get some balance between the way the MPC is formed and behaves and the way that this new FPC works. The MPC has existed on the basis of four internal members, four external members and the governor, which is a total of nine. The other important principle that has always been emphasised is that each member of the committee had to act as an individual. They were not there to behave as a collective body; indeed, we have often seen, in the case of the internal members of the Bank of England, that they have voted in different ways. I would see great merit in carrying over the principles of the MPC into the FPC, which is that there should be a governor plus equal members, excluding the governor, from inside the Bank and outside the Bank.

I have two questions to add. The first is, does the Minister understand that the arrangement will be the same as for the MPC, which is that the members of this committee are being asked to behave as individuals, and to have individual, rather than collective, responsibility? That is important. The second question is that, as I read this, there is scope for all three deputy governors to be on this committee. Will all three deputy governors be on the MPC? I cannot remember what happens. If that were the case, it would change the balance of the Monetary Policy Committee. The membership includes the chief executive of the FCA. I can quite see that he would wish to be present at the meeting, but it does not seem to me that he needs to be a voting member of the FPC, given that his responsibilities are somewhat distant from the FPC’s main tasks.

My main point is about individual accountability as far as the people are concerned, not an expectation that the internal members would be acting as a group. As far as possible, we should hold some kind of symmetry between how the MPC and the FPC are set up, otherwise I can see that, over time, there would be constant pressure, with one saying, “Well, the other one is set up in a different way—shouldn’t we move to that?”.

Financial Services Bill

Lord Burns Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Burns]

My Lords, I begin by drawing attention to my entry in the list of Members’ interests: in particular, that I am chairman of a regulated bank, Santander UK, and a shareholder in Santander Group. As we have heard from the noble Lord, Lord Sassoon, the Bill seeks to respond to the lessons of the present crisis. However, I agree with a number of speakers in this debate that we cannot lay the blame for the financial crisis entirely, or even largely, on the architecture of financial regulation. The banking crisis has been a worldwide phenomenon and, as the noble Lord, Lord Eatwell, has pointed out, at its heart was an intellectual flaw—the belief that developments in financial management techniques and globalisation gave us the opportunity to expand lending while spreading risk. This mistake was made by banks, regulators and Governments. At the same time, though, it is also widely accepted that in a number of respects the existing architecture, particularly the tripartite arrangements, did not function as well as we would have liked, and this legislation seeks to address some of those weaknesses.

I agree with many noble Lords that the most important aspect of the Bill is the responsibility being given to the Bank of England for what has become known as macroprudential policy. However, while supporting this change, I think that we must be aware of the difficulty of the task. Like all forecasting, identifying financial bubbles is always difficult—indeed, it is almost impossible. After all, the MPC did not foresee the extent of potential effects of the bubble, and it is not clear to me why we should be confident that the FPC would have done so much better in dealing with those problems, unless it had managed to identify some automatic stabilisation mechanisms.

We must also guard against concentrating too heavily on avoiding the pitfalls of the previous crisis. Looking back at the design of the previous legislation at the end of the 1990s, in which I had some involvement, I recall two outcomes that the Treasury sought to avoid. One was that we might end up with an unnecessary overlap of work on financial stability, with both the Bank of England and the FSA competing for influence in this area. In the event, neither organisation was doing as much as we now think appropriate. The Treasury also worried that the Bank of England was too inclined to rescue banks and wanted to build in safeguards for appropriate consultation with the Treasury as the provider of funds. The possibility set out in Alistair Darling’s book that the Chancellor would be pressing the Bank without success to provide more liquidity to banks was not on the list of concerns 15 years ago. So, as well as dealing with the lessons from the most recent crisis, it is important that we also prepare for a wider set of challenges, behaviours and events. As the noble Lord, Lord O’Donnell, said in his excellent maiden speech earlier today, we need a robust framework and should not simply seek to deal with the issues that we have experienced over the past five years.

Personally, I support the ambitions of the Bill. However, there are three areas where I see room for improvement. First, I add my support to those looking to ensure that the framework of the macroprudential policy provides sufficient safeguards to ensure that the proposed FPC adopts a symmetrical approach to macroprudential supervision—that is, it should be equally as aware of the problems of a policy being over-restrictive as it is of over-exuberance.

The Bill has some checks and balances, requiring the FPC to avoid an adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term, but I question whether this is enough. That is not to say that this is not a difficult problem; we can see the difficulties in maintaining symmetry in the present situation. After all, if macroprudential policy means anything, we should now be going through a period where it is directed at supporting economic activity. However, we also have to have sympathy with the instinct of the supervisors of individual banks who want to secure the safety of the banks that they supervise by requiring increased amounts of capital and liquidity in those banks. That is, after all, one of the crucial lessons from the crisis.

The problems in the euro area also point to strengthening the liquidity and the capital defences of the banks. My point, though, is that the systemic effect of these individual decisions has to be monitored closely and carefully so that the requirement for the safety of individual banks is balanced with a view about what is needed to support growth in the economy. For me, that would be best achieved by having a clear requirement for symmetry in the conduct of macroprudential policy. How that should be done is not an issue for today but, as a minimum and in line with the MPC’s remit, the MPC needs instructions that make clear that over-rapid reductions in leverage, debt and credit growth should be judged as being just as bad as unsustainably high levels. That is very much the framework for the MPC in terms of inflation, and I do not see why it cannot be carried over into this aspect of policy as well.

My second issue relates to the Chancellor’s power of direction over the Bank of England. There seems to be general acceptance that where there is a material risk to public funds, the Chancellor should have the power of direction. I have two points to make. First, I agree with the Treasury Select Committee that in these circumstances it would be better for the Chancellor to have a general power to direct rather than the complex, circumscribed descriptions that are provided in the Bill. I understand the concerns about giving the Treasury authority to intervene in matters that have been delegated to the Bank of England, but I would rather they were dealt with by reporting and scrutiny arrangements with respect to Parliament rather than by trying to be specific about the instruments of crisis management, which stand no chance whatever of being the most appropriate ones when the time comes.

I also have some misgivings about limiting this power of direction to when the Bank of England has determined that there is a material risk to public funds and not including occasions when the Chancellor takes the view that we are facing a material risk to the macroeconomy. Again, this is an issue of symmetry. It is not difficult to imagine circumstances in a crisis when the Chancellor feels he needs the power of direction to use public funds to support the financial system from a general macroeconomic perspective and there is a disagreement with the Bank. At times of crisis and dislocation when rapid action is needed, the Chancellor has to be clearly in the lead, and this needs to be made clear in this legislation.

My third topic is the governance of the Bank of England. There is general acceptance that the new responsibilities of the Bank of England come with a need for new accountability mechanisms. It appears that there have been improvements in recent years in the court’s oversight of the Bank of England from a perspective of the Bank’s financial and resource planning, although the noble Lord, Lord Myners, questioned that earlier this afternoon. The big issue now is whether there should be an enhanced role for the court in the oversight of the policy process. I shall make a few observations. First, I agree with the Treasury Select Committee and the noble Lord, Lord Eatwell, that governance cannot be a matter for the Bank itself. The broad structures and responsibilities of the court and the main committees must be a matter for Parliament. Secondly, I agree with other noble Lords that within this framework success will depend heavily on the behaviour of the people involved and that being overprescriptive about governance is a potential trap because the prescription so often does not suit the different circumstances at the time.

My third observation is related to this. It is that we should avoid making this too complicated. In this Bill, there is a real danger of creating multiple committees with inconsistent memberships and oversight procedures along with overlapping and overprescriptive responsibilities. I see this in a large number of cases. The Minister has indicated that the Government are looking at this, and I hope that during this legislative process some simplification can be achieved. That may involve looking at the membership, structure and oversight arrangements of the MPC as well as of the FPC, but I find it quite alarming that there is so much difference between the approaches to these two committees. It is not clear why the structure of the MPC and the FPC should not be consistent in terms of numbers, the balance between executives and external members, the principle of an annual remit from the Treasury and the oversight arrangements. Indeed, as argued by Sir John Gieve in the Financial Times today—the noble Lord, Lord Desai, has mentioned this tonight—in the fullness of time I could easily see the two committees becoming a single committee. In the mean time, I suggest that the members of the FPC who are not on the MPC should have the right to attend, but not to vote, at the MPC and vice versa for members of the MPC who would like to attend the FPC so that they get a much broader view of the concerns of both committees.

I also agree with the Treasury Select Committee and the noble Lord, Lord Flight, that the court should act as far as possible in the style of a unitary company board. Given what has happened to so many other organisations in the public sector, it is not clear why it should not also go down this route. Under this arrangement, much is down to creating a successful working environment between the executives and the non-executives. That has to be both challenging and supportive. One important component is that there should be an appropriate and open method of reviewing decisions and the decision-making process after the event. I notice that there has been some disagreement between the court of the Bank of England and the Treasury Select Committee about the nature of reviews of policy decisions and the decision-making process and about whether policy decisions should be included or whether reviews should be only about the process.

My clear preference is for the court to have oversight of both the process and the outcome of policy decisions. Very often this can be done internally in a way from which organisations can learn for themselves. One sees this happening in many organisations, although sometimes the issues are complex and the differences of interpretation are so sharp that an external review is the only way to do it. However, whether reviews are internal or external, they should happen and they should be allowed for in this legislation. My view is that the non-executives should commission such policy reviews. They should not conduct them, which the Treasury Select Committee suggested. In that case, one would run the risk of serious breakdown of trust within the court. However, the whole principle of reviewing policies and processes—of trying to learn what one can from past mistakes, or even successes—is a crucial part of how an organisation can improve its performance over time.

Budget Responsibility and National Audit Bill [HL]

Lord Burns Excerpts

Monday 31st January 2011 Lords Chamber

[Baroness Noakes]

My Lords, I add my support for the amendments. It is to the great credit of the Minister that he took away the good discussions we had in Committee and has produced this and the other amendments today.

The noble Lord, Lord Barnett, referred to the OBR being regarded as the Government’s in-house forecasting body. I have never heard it referred to in those terms, although I know that noble Lords on the Benches opposite have tried to make that accusation stick. I believe it is already regarded as a properly independent body under its chairman, Mr Robert Chote, and we should rejoice in that.

[Lord Burns]

I also welcome these amendments. We spent a great deal of time in Grand Committee trying to bring greater clarity to the remit of the OBR and protecting its independence. We also tried to clarify the governance of the OBR and, particularly, the role of its non-executive members. The Government have responded positively to those discussions. The amendments deal very well with the bulk of the issues that were raised, particularly in clarifying those areas of the remit where there was ambiguity and the role of the non-executive members in relation to their oversight of the forecasting process and as the protectors of the external review process. That has been a success.

I fear that there will always be a certain amount of tension between observers when it comes to the relationship between the forecasts of the OBR and the activities that take place within the Treasury. I pointed out at Second Reading that whatever arrangements are put in place for the OBR, you cannot strip the Treasury of its own skill set and the resources it needs to monitor the progress of the economy and to make judgments on whether the economy is following the track that was intended at the time that measures were taken. This is an arrangement that we have to live with. I am sure that as time goes on, we will see much more clearly the way in which those are worked out and how the OBR relates to the internal activities of the Treasury. I hope that noble Lords will not get too exercised about this. That is a natural tension that exists in this type of arrangement and I would be surprised if it cannot be made to work.

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[Lord Burns]

My Lords, the noble Lord, Lord Eatwell, describes his proposed change from at least five years to at least three years as “crucial”, but his whole argument as set out implies that, on all occasions, the non-executive committee would choose to have this review at the very end of the period during which it is allowed to have the review. I cannot for one moment imagine that that is what it would do. If we are to have confidence in the non-executive committee that is being set up in the Bill, it seems to me that we have to give it quite a lot of discretion about the timing of when it thinks it is appropriate to have a review. That will be governed in part by the extent to which the outcome of the work of the OBR comes under criticism, the extent to which we think there are lessons to be learnt. I am content with the five years not because I think the review should take place every five years, but because I think that the onus should be upon the non-executive members to take the decision about the timing—one should not box them in too much.

By bringing this forward and suggesting that it should be every three years, we are setting a clear timetable as to when those reviews will take place, rather than leaving it in the hands of the committee that is being set up in the Bill to make that decision. I hope that the noble Lord, Lord Eatwell, will reflect on the emphasis that he has given to this five-year period and his interpretation that the committee will always let it run the full length. I would rather show more confidence in the role of the non-executive body and give it discretion as to when is thinks is an appropriate time to have that review in the light of circumstance and events and how the work of the OBR is seen.

[Lord Myners]

My Lords, I support Amendment 6 to Amendment 5. I was not in the House for the beginning of Report, but I add my congratulations to those that I understand were expressed to the Minister on rejecting the advice that Ministers so often receive to resist and instead listening carefully to what was said by all sides in Committee, taking that into consideration and bringing forward a set of very constructive and welcome amendments. That shows the House performing its correct and proper function of revision, being professional and efficient, enhancing the quality of the Government’s intention and not unduly delaying the House in so doing.

I repeat my support for the concept of the Office for Budget Responsibility. I hope that, just as the Minister reminded us during Oral Questions that the previous Government established the Monetary Policy Committee which is now an important part of our financial and economic infrastructure, the OBR will be a similar testament to this Government’s contribution to building a sustainable and effective architecture. However, I support the amendment put forward by my noble friend Lord Eatwell because it seems to me that the symmetry between the electoral cycle and five years is simply inappropriate for something which should be established to stand well apart from day-to-day politics and the electoral cycle.

It is particularly important that the work of the OBR should be subject to independent review in a shorter period than five years at commencement. It is new, and it is going to be establishing a lot of new ways of working and new formats for reporting that no doubt will evolve over time. It would be unfortunate if we did not have a chance to stand back and look at how it was performing and how its contribution could perhaps be further enhanced before five years had elapsed—before we got to 2016.

There is a strong reason for having these reviews in periods of not more than three years, rather than in periods of not more than five years, as proposed. However, the noble Lord, Lord Burns, is right to remind us, as I am sure the Minister will in his closing speech, that the current draft says that, as it should not be more than five years, it could well be that the committee, the membership of which has not yet been selected or identified, could choose to make the reports earlier. For the purpose of good order and good process and, frankly, to strengthen further the integrity of the OBR and the confidence that it will be able to sustain from the broader public, these reviews should take place more frequently than once every five years. Once every three years would be a better outcome. It is for that reason that I support Amendment 6.

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[Lord Higgins]

My Lords, given that I was chairman of the Treasury Committee in another place for something like 14 years, I am naturally rather sympathetic to the amendment. However, it does not seem to do what the noble Lord, Lord Eatwell, said it does. It does not enable the Treasury Committee to control the budget, but enables it to ensure that the budget is scrutinised after being published. This is something which my noble friend should readily accept, because it would be very surprising if the annual operations budget were not to be published. I should have thought that that was consistent with the whole argument for transparency which we have heard from the Government throughout the debates on this Bill, and that it should be virtually automatic. It is equally likely that the Treasury Committee would wish to scrutinise the budget, once published. My noble friend might of course argue that it is unnecessary for the amendment to be made, but, if it were, some reassurance would be given to those expressing the kind of view expressed by the noble Lord, Lord Eatwell. It would certainly be right for the budget to be published and for the appropriate body to look at it to be the Treasury Select Committee in another place.

[Lord Burns]

My Lords, I will disappoint the noble Lord, Lord Barnett, by agreeing with the amendment, or rather with its spirit, because it is important that the funding of the OBR is as transparent as possible. We need an arrangement that will last. We all know that the Treasury has great power and I accept the argument that the OBR needs the protection of a transparent process. Of course, nothing would in the end prevent the OBR from suffering in respect of its budget if the Government wished that to happen and could get the support of Parliament, but it is important that that process should be transparent. I recognise the argument that it is already evident from the public expenditure process that there is nothing to stop the Treasury Committee being involved, but I support the principle of making a specific provision for the funding of the OBR that should be as transparent as possible.

The detail in the amendment that I am not happy with is the suggestion that the committee should investigate the annual budget. It is important that if you are to have a successful operation such as the OBR, it should know what the prospects for its finances are, stretching beyond one year. Subjecting it to an annual budget process might not do the job. The noble Lord, Lord Eatwell, already referred to Sir Nicholas Macpherson’s existing letter talking about a financing process that stretches some way ahead.

I therefore support the principle of the amendment and hope that it is possible to find a way of expressing its intentions that provides reassurance that a transparent process will be in place and will stretch for somewhat longer than the annual budget round.

Budget Responsibility and National Audit Bill [HL]

Lord Burns Excerpts

Thursday 9th December 2010 Grand Committee

[Lord Eatwell]

My Lords, I hope we can have a fairly brief Committee today, not least because the annual contest between the universities of Oxford and Cambridge at Twickenham has just kicked off. This, however, is not a contest but an attempt to improve the Bill. In moving Amendment 40 and speaking to Amendment 43, I believe we can significantly improve it.

We have already discussed whether the OBR should write its own school report, as the noble Baroness, Lady Noakes, referred to it. There was general agreement around the House that that was a bad idea. In proposing this amendment I have, as I am sure Ministers and officials have, examined procedures in equivalent organisations in other jurisdictions. The most relevant of these is the US Congressional Budget Office, although there are significant differences between the two organisations. The CBO is answerable to Congress, whereas the OBR is a creature of the Executive. This has been the source of many of our difficulties in constructing a framework of independence. None the less, we have something valuable to learn from the CBO, which uses clear and extensive peer review. As I am sure the Minister is aware, the CBO is scrutinised by a large and very distinguished peer review committee of, I think, about 20 people. Nothing so large is necessary for the rather more limited activities of the OBR. None the less, independent peer review will undoubtedly be valuable. It will not only add to the intellectual input to the activities of the OBR—undoubtedly a positive factor—but act as a further buttress to independence. The peer review committee of the Congressional Budget Office publishes its findings on the CBO website, enhancing the transparency of the entire process.

We have already discussed the need for the past forecasts of the OBR to be assessed by some independent authority. That independent authority could be the peer review committee proposed in Amendment 40 to the Bill and Amendment 43 to the schedule, although there could be other ways of doing it. Amendment 40 provides the peer review committee with clear and unambiguous terms of reference. It must report on,

“the accuracy of fiscal and economic forecasts prepared by the Office, including the appropriateness of the methods employed”.

This is a clear technical remit; the committee would not be allowed to stray into the realms of policy.

Amendment 43 provides some detail on the appointment of the peer review committee. Again, I have looked at the practice of the Congressional Budget Office, where many of the members of the peer review committee are nominated by the council of the American Economic Association. I have suggested that the ideal body to recommend to the Chancellor persons of appropriate technical expertise would be the equivalent professional body here in the UK—the council of the Royal Economic Society. Otherwise, appointment will be by the Chancellor, with the approval of the Treasury Select Committee of another place.

It might be argued that the process of peer review will take place anyway in the context of vigorous debate among economists and econometricians over forecasting and policy. However, I submit that without a dedicated peer review committee this debate, which will take place anyway, will tend to be unfocused. The particular value of the peer review committee is to have a group of very well qualified professionals who see it as their responsibility to examine the results and the methods of the OBR. As I suggested, there may be other ways of achieving this objective, but I believe that an independent review of the OBR’s record and methodology will add tremendous value to the process and help to buttress the independence of the OBR, which is something that we all seek. I beg to move.

[Lord Burns]

My Lords, I have a lot of sympathy with the idea of having independent reviews of forecasts and the methods employed at some intervals during the process. My concern is whether the amendment makes too much of a meal of the issue. It is important to have an appropriate way of appointing an independent person or persons to undertake this work. My preference would be to give this job to the non-executive directors of the OBR. That seems a perfectly respectable way to do this. It is common practice in companies that the independent directors should appoint auditors and should look after other forms of oversight.

I cannot believe that a group of five people is needed to undertake this task, which, as the amendment says, is to evaluate forecasts and to look at the methods used. If we are not careful, we will have the same problem as we have had with the MPC—quite soon, one runs out of qualified people to fill a committee.

I also have concerns about whether an independent review is needed every year. Not a lot will change each year. We will have one year’s figures in the forecasts and we will be able to look at the outturns. When one is looking at issues relating to bias and variables, one typically needs a run of years to be able to see the pattern of the forecasting record. The Bill suggests that there should be an annual review, but to me the issue is how often one needs independent input into this process. I would be cautious about that. It is a task that one could leave to the non-executive directors, who would decide whether, for example, an independent review was needed every year or whether internal and independent reviews should be held in alternate years. I would leave it to the independent directors, or members of the office, to determine the number of people needed for these investigations, who to recruit and whether to recruit the same people on successive occasions.

I support the idea of independent input, but let us not make a meal of it. The task is on a different scale from that in the US example that the noble Lord, Lord Eatwell, cited. We need something of a size that is appropriate to the task in hand.

[Lord De Mauley]

My Lords, I am grateful to the noble Lord, Lord Eatwell, and his noble friends for their amendment and to the noble Lord, Lord Burns, for his contribution. The Government recognise the importance of external expert challenge, which is the issue that the noble Lords have raised. Indeed, the fact that the OBR analysis is publicly available means that it is open to scrutiny.

On a previous occasion, we debated whether the OBR should produce an assessment of forecast accuracy. This process needs expertise in forecasting, which the OBR clearly has. The Government argue that this expertise will be difficult, although not impossible, to find elsewhere. It also requires a full understanding of the data underpinning the forecasts. Again, the OBR has this, and a similar level of knowledge is scarce elsewhere, although, I acknowledge, not unobtainable.

Assessing previous performance provides a very valuable opportunity for the OBR to learn and understand what has driven diversions from accuracy. It is clear that it is the OBR’s intention to use the report in this way and that it has the right skill set to do so. The noble Lord, Lord Eatwell, mentioned the Congressional Budget Office. I understand that, although it does indeed have a panel of external advisers who meet twice a year, the CBO carries out its own analysis of previous forecasts. I think that our proposed design is in line with discussions with international organisations.

The proposals in the amendment raise a number of issues that we need to consider. The Government, for example, believe it is difficult to envisage that the committee could get into the detail needed to produce a comprehensive and meaningful assessment. Like the noble Lord, Lord Burns, we share the concerns about a body of five people being needed to scrutinise this work. We are not sure whether the noble Lord envisages that they would be paid and, if so, how much. We also feel that there is an issue of focus and that it might be appropriate to look at a larger section of the OBR’s work, because perhaps all parts of its work could benefit from external expertise.

In general, in a broader context there is nothing to stop any person or organisation assessing the OBR’s forecast accuracy by looking at its forecasts and comparing them with the actual outturn data. Where value can be added is in making sure that the OBR uses all the best information. That is why we put an emphasis on transparency across the piece. None the less, we accept that bringing in external expertise could be very useful. We believe that it is consistent with the Bill as drafted but that it is important to take a more proportionate approach. Of course, the OBR already has the power to convene advisory panels to provide external perspectives if it sees fit, and Robert Chote indicated his interest in that in his evidence to the Treasury Select Committee. The OBR is already drawing on external expertise, as noted in its autumn forecast statement.

In conclusion, the Government will reflect on whether additional steps are needed in the light of this very helpful debate and suggestion. In particular, I am interested in the suggestion of the noble Lord, Lord Burns, which I should like to take away and think about.

Budget Responsibility and National Audit Bill [HL]

Lord Burns Excerpts

Monday 6th December 2010 Grand Committee

[Lord Burns]

My Lords, perhaps I may add to the point made by the noble Baroness, Lady Noakes. The OBR will produce two forecasts a year. Between them, data will emerge, conditions will change and all kinds of things could happen in the world at large. The Treasury will need to take a view during that period of whether or not the events that are unfolding are consistent with the forecasts. The Treasury will want to prepare for future announcements of one kind or another. It is hugely important that it retains the capacity to monitor what is happening to the economy in the mean time, to make an assessment of whether unfolding events are consistent with the OBR’s previous forecast and to prepare itself for the work that continually goes on. One of my worries throughout the establishment of the OBR has been that some capacity within the Treasury will inevitably be required if the Treasury is to continue to do the job that it does month by month. The Treasury has to prepare Ministers for speeches, answering questions and making observations on whether or not the economy is evolving in the way that it thought. The idea that there should be no capacity left in the Treasury to make this kind of analysis is frankly unrealistic.

--- Later in debate ---

[Lord Newby]

My Lords, I am sure that all noble Lords wish that Chancellors were models of balance and completeness in the way in which they present figures, but the noble Lord, Lord Myners, is placing an unrealistic burden on the OBR if he expects it to undertake this task. For example, he uses the word “balance”; balance is not an objective fact but, to a considerable extent, is a subjective view. That goes equally for “completeness”—at what point does the failure to refer to the paragraphs on page 73 in the OBR report render the Chancellor’s statement incomplete? When the Chancellor has made a political speech on the economy, to expect the chair of the OBR to audit it, to coin a phrase, in some way as the noble Lord suggests is, frankly, impossible. While I agree with the sentiments behind the amendment, I do not think that it is workable.

[Lord Burns]

My Lords, I support the remarks of the noble Lord, Lord Newby. The noble Lord, Lord Myners, knows that what he is asking for is impossible; we also know that he can be very good at creating a little bit of mischief every now and again and we have to see this amendment in that light.

The OBR can be responsible only for its own documents; it cannot possibly hold the Chancellor to account. That is a job for Parliament, including the Treasury Committee and the Economic Affairs Committee. I can think of nothing that would make the job of the OBR more impossible than to give it a task that began to resemble this. The key thing is that the OBR has to be kept out of the political debate but the noble Lord, Lord Myners, implies that he would like to plunge it directly into that debate. I am sure he has used the amendment as a vehicle to make quite sensible points about some of the practices that occur from time to time, but the OBR will not protect us from those.

[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.

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[Lord Newby]

We had a long debate on this issue at our previous meeting and I am not going to rehearse all the arguments. I suggested, out of frustration, that we were spending too long on this form of words, which, in slightly more words, actually had the same purpose as Amendment 31. We did not spend any time looking at it, because we were considering the amendments in order. However, Amendment 31 is clear and achieves the purpose that we sought to achieve in our debate last time, which was that the OBR, in making its assessments, obviously should take account of government economic and other policies. Equally, in the context of the second part of the subsection, the OBR’s role should not be what the noble Lord, Lord Peston, thinks it would be. It should not be able to stray and look at anyone’s alternative policies—that way madness lies. The OBR must have a straightforward remit to look at what the Government are proposing and work on the assumptions that the Government are making in their policies.

[Lord Burns]

My Lords, I agree with the noble Lord, Lord Newby. I had hoped that the purpose of the clause was to restrict the activities of the OBR to avoid it getting into political trouble. There are two clear cases where I could see this happening. One is where it is asked to continue a practice that has emerged in the past 20 or 30 years, whereby a Government ask the Treasury to cost the opposition manifesto as an election approaches. That practice has been divisive and has not suited anyone. I had hoped that this clause, by restricting the OBR to consideration of government policies, would prevent the Government or anyone else—for example, the Treasury Committee—asking it what the effect would be of implementing the Opposition’s manifesto.

The second thing that I had hoped would be avoided was getting into the sort of detailed arguments that took place in the summer about what the effects of particular packages of measures would be on economic activity, unemployment, the PSBR and so on. The remit given to the OBR by the Bill, as I read it, is to tell us what the effect would be on public finances of a whole set of government policies, taking into account the world environment and everything else, and whether or not the Government are on a sustainable path as a result of that collection of policies. That remains very challenging and is what the OBR’s job should be restricted to. It is set out early in the Bill. I had assumed that this clause was there to prevent encroachment, or a widening of the OBR’s remit to include a number of other things, all of which would lead us into a difficult area of political activity.

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[Lord Burns]

My Lords, for the reasons that I have set out about the importance of the political impartiality of the OBR, I felt that the original subsection (3), although a little inelegant, did much of its job. However, I also support the spirit of Amendment 31, although I am a little concerned about the use of “effects”, which could in future give someone the opportunity to ask to have particular subsections of government measures analysed for their effects on the economic outcome and on the public finances. I worry that going down that road could cause problems in future.

[Lord Sassoon]

My Lords, perhaps I might go back to confirming what we are seeking to do and not to do in the Bill. We have discussed all these related issues at some length. The noble Lord, Lord Burns, has got it pretty much spot on in terms of what we are trying to achieve, but for the avoidance of doubt I shall restate it.

With regard to the core forecasting remit, the intention is that the OBR should consider government policies and not other policies. To take the point made the other day by the noble Lord, Lord Eatwell, we want to ensure that the OBR can take account of external shocks, for example, so in technical drafting terms his amendment would not quite work as it focuses narrowly on policy. We agree, anyway, that it is the Government’s policies and not other policies that need to be considered. We must not leave out the fact that, in doing the forecasts, the OBR can look at scenarios and at other issues.

With regard to the noble Lord’s specific question about an EU-related policy, either it has been adopted by the UK Government and is therefore included in government policies or it is not. Either the EU policy example has been adopted as policy in the UK or it has not, therefore it falls accordingly. That would get picked up, so that much is clear. Equally, it is the clear intention that the OBR should not be drawn into costing alternative policies, whether they are opposition policies or just other scenarios or partial packages of policies. That is what is intended by the construct in the Bill, and part of it is clarified by paragraph 4.12 in the draft charter.

Even though I am convinced that the Bill achieves what most, if not all, of us are trying to achieve in these various respects, I take to heart the fact that we have spent a lot of time going around the interaction of Clauses 4 and 5(3) and, to an extent, the relationship with Clause 1. Notwithstanding the fact that I think that the Bill works as drafted, I am listening carefully to all the points being made. I will go away and see whether anything can be done to make it even clearer in the Bill what the intentions are. However, it is difficult drafting. We should certainly not take out Clause 5(3) in its entirety, because, as the noble Lord, Lord Burns, pointed out, we want to make sure not only that the forecasts are concentrated on the right thing but that the OBR is not drawn into other political controversies.

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[Lord Sassoon]

I assume that in all normal circumstances it will look intently at the forecasts of the MPC about future inflation and interest rate prospects.

[Lord Burns]

Perhaps I may help the noble Lord, Lord Peston. One must assume that the Monetary Policy Committee will abide by the law under which it conducts its affairs.

[Lord Sassoon]

In summary, I cannot promise that there is any way of making all this clearer. I think that there is consensus among us as to what we are trying to achieve in this area. I shall think hard about whether we can make it even clearer. On that basis, I ask my noble friend Lord Higgins to consider withdrawing his amendment.

Budget Responsibility and National Audit Bill [HL]

Lord Burns Excerpts

Wednesday 1st December 2010 Grand Committee

[Lord Peston]

I did not create this problem. I did not set this body up. Unlike all other noble Lords present, I do not happen to be much in favour of it, but that is another matter. The fact is that our duty in this House, when a piece of legislation is going through, is to make it better. That is our role. So this is not my responsibility, but my point is that if we are going to have such a body, whose essence is its independence, if it turns out that the staff are secondees, that undermines its independence. It will not be independent any more.

[Lord Burns]

I support my noble friend Lord Turnbull and the noble Baroness, Lady Noakes. This amendment is totally unrealistic. To imagine that one should bar secondees from this kind of activity is extraordinary. There can be no real career structure within the OBR. There are specific sets of jobs and there will be little potential for advancement. It is bound to provide activities that people will take on for a certain period, after which they will move on to do something else. Inevitably, they will wish to hold on to their employment in a department which actually offers them the possibility of a career structure.

I think that the noble Lord hugely underestimates the independent-mindedness of many civil servants. During my time in the Treasury, and I am sure subsequent to that, we had many secondees from other departments who would work in our expenditure divisions. They would work effectively in support of the Treasury by running, very often, the expenditure policies relating to the departments from which they had been seconded. I had no difficulty with this. Indeed, when I first joined the Treasury, my noble friend Lord Kerr was on secondment from the Foreign Office to the Treasury in order to carry out the expenditure work of the MoD. These are everyday, bread-and-butter activities for civil servants, and I am confident that they can work very effectively.

Clearly there would be a problem if the executive members of the OBR were on secondment from the Treasury, but I assume that that is not what is in mind and that the mechanisms which have been put in place in terms of their appointments will safeguard against that. However, we must be realistic about these arrangements. As long as the senior people in the OBR are appointed under the correct processes so that they are independent, it should be for them to recruit the people who they think can carry out the tasks most effectively. To surround that with lots of restrictions is not only unrealistic but, as my noble friend Lord Turnbull said, very damaging.

[Lord Eatwell]

This is a tricky issue but the balance has been struck by a combination of the noble Lord, Lord Turnbull, and my noble friend Lord Myners. If the staff of the OBR is simply a rotating group of Treasury officials, the appearance of independence, which is so important to the OBR, will be endangered. We should remember especially the crucial independence of method set out in Clause 6(2). If it is a rotating group, it will carry with it the method that it brought from the Treasury. On the other hand, I recognise that we do not want to limit the career prospects of staff or the quality of staff; we want to get the best people we possibly can.

The Government cannot be complacent about this. The OBR will undoubtedly be under close scrutiny and it will not do for it to allow employment to be a revolving door connected to the Treasury. It is up to the Government to come up with an answer. If they want the OBR to have independence, they will have to find a solution to the staffing problem. I am afraid I do not have it; if I did I would offer it. Given its independent role under Clause 6(2), it is clearly a problem. However, I entirely agree that we should not in any way endanger the career prospects or the quality of the staff of the OBR.

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[Lord Higgins]

My Lords, I presume that the Minister will confirm whether the budget is going to be published. If it is, clearly the Treasury Select Committee could have a look at it if it wished. It seems more likely, however, that it would be examined by the Public Accounts Committee rather than the Treasury Committee, having already been looked at by the Comptroller and Auditor-General.

[Lord Burns]

My Lords, I support the spirit of this amendment for the reasons put forward by the noble Lord, Lord Eatwell. I am sure that no problems with the budget will arise during the early years of the existence of this body. Indeed, it has probably already been agreed in the present expenditure round. But if we are going to safeguard the OBR into the future, it is necessary to have a system of public accountability and the opportunity for the executive members and perhaps the non-executives to be questioned by the Treasury Select Committee whether they think the resources being made available to them are sufficient to do the job. On this occasion, I disagree with the noble Lord, Lord Higgins, because this is an issue that falls to the Treasury Select Committee as the body with oversight of the extent to which the OBR is doing its job effectively.

In most cases I suspect that these issues would arise naturally, without having to include them in the Bill, so I shall listen carefully to what the noble Lord, Lord Sassoon, has to say in reply. As I said, however, the spirit that is captured in the amendment is an important safeguard in terms of the future of the OBR. That is because in five or 10 years’ time, the circumstances surrounding the body may be very different.

[Lord Sassoon]

My Lords, let me see if I can help by making clear what is actually going on and what is intended here. The first point to bear in mind is that HM Treasury is not incentivised to underfund the OBR because it will be relying on the office to produce the official forecasts. We need to bear it in mind that the OBR provides a critically important component to feed into the Treasury’s economic and fiscal policy-making. I am not sure what the circumstances could be in which the Treasury would want to starve the OBR of funds because it provides such a critical service to the Treasury itself.

The second point is this. Noble Lords may not have seen it, but the funding has been put in place not for one year but is committed through the spending round period from 2011-12 through to 2014-15. The spending letter from Sir Nicholas Macpherson, the Permanent Secretary to the Treasury, has been published by the OBR. It makes it clear that the funding allocation is £1.75 million per year flat cash at a time when the Treasury group settlement is minus 33 per cent. The position for the next few years is clear. Sir Nicholas goes on to say in his letter:

“Should you find that you are unable to manage within the constraints of this allocation, please raise this with me at the earliest opportunity”.

So the initial funding is in place with an open invitation—which, as I have said, is very much in the interests of the Treasury—to the OBR to raise any matters of any potential underfunding. Robert Chote himself highlighted the importance of the OBR’s funding position when talking to the Treasury Select Committee:

“If you accede to my appointment and I find myself being squeezed in that way, this Committee will be hearing about it very promptly. That’s how we make that public and ensure that those sorts of pressures do not go unremarked”.

He is clear in the substance about where he would immediately go.

There are a number of specific safeguards in the legislation that go further. Schedule 1, which provides for the funding arrangements, ensures that the OBR’s independence and effectiveness will be protected. There will be a separate line for the OBR in the Treasury Estimate and the body will produce its own accounts which will be laid before Parliament. Furthermore, it will be able to submit an additional memorandum alongside that of the Treasury, which will be submitted to the Treasury Select Committee.

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[Lord Burns]

My Lords, I have been struggling with this debate. I have had difficulty in seeing where it was going. When I looked at the amendment of the noble Lord, Lord Eatwell, I thought, “Surely everyone assumes that that is the way that it will be done in any case”. In that sense, I am not sure what the amendment adds because I do not understand what the counterfactual position would be if the OBR tried to do an analysis of sustainability that was not in the light of the Government’s economic policy. To the extent that the amendment would clarify a situation if there were any real doubt about whether that would be the position, then I can see that it has merit.

I am not contradicting what the noble Lord says about how this should be done. I would expect the OBR to do it in that way, largely because I cannot see how it would do it in any other way; it would be rather limited. My assumption is that the response to this will be, “It isn’t necessary because everyone would assume that this was the way that it would be done”. I agree with everything that the noble Lord has said about how one would hope that this would be done; my only question is whether the amendment is necessary.

On the question of how far one wants to spell out the issue of sustainability, my preference would be to leave the OBR to give its own definition and present its own analysis. It would then be up to others to question whether it had done that correctly, whether it had missed out something in its definition of “sustainability” or whether the analysis was too narrow and should have been broadened. That could easily be a subject for debate after the OBR had presented its report, and no doubt it would then be taken into account when it made its next report.

If we follow much of the debate that has gone on, and if we are setting up something that we hope will last a long time, I am conscious of the fact that there are not many aspects of economic policy that remain unchanged for long periods of time. People’s interpretations of words and policies move over time. I would be cautious about trying to be too specific about what we mean by “sustainability”. In the broadest sense we understand what it means but, if circumstances were to arise that required a different definition or we had to assume that the Government would react in some way in future to certain types of events and that were to be built into the analysis, that could be done.

I find myself agreeing with the amendment, but I question whether it is necessary or whether it would not be assumed that what it suggests would already be the case.

[Lord Sassoon]

I am grateful to the noble Lord, Lord Burns. I think that he gets it right. I am sympathetic to the underlying concern of the noble Lord, Lord Eatwell, to try to solve a problem. The analysis of sustainability—the main duty of the office—has to have regard to, and be in the light of, the Government’s economic policy, so I do not think that there is any other way of doing it. Of course we must get the technical drafting right on this. In so far as there is any potential problem, we need to get it right.

I sometimes find the drafting of these things a bit obtuse, but I am advised by the experts on how these things are drafted that Clause 5(3) deals with the issue that the amendment is intended to remedy. That subsection states:

“Where any Government policies are relevant to the performance of that duty, the Office may not consider what the effect of any alternative policies would be”.

[Lord Sassoon]

It seems to deal with what should be excluded rather than what should be included. Due to the way that legislation is constructed, however, I am told that by referring to what should not be considered, the link to what should be considered is there by implication and hard-wired into Clause 5, which is the critical provision on how the main duty is to be performed. I am advised by the experts on these matters that we have in the Bill what is technically necessary to make the link through to the Government’s economic policy. Further to that, we have to be careful—this very much relates to the point made by the noble Lord, Lord Burns—because there are a lot of other matters in here that may come and go, to which the main duty of must have regard. Yes, it relates to economic policy, but what about the Government’s taxation and expenditure policies? What about the potential for the impact of external shocks? There is a danger here that if we agreed to the amendment, it would boilerplate the importance of the duty being carried out,

“in the light of the Government’s economic policy”.

I agree with the noble Lord, Lord Burns; how could it be any other way?

[Lord Burns]

I had assumed that the term “economic policy” encompassed all of the things that the Minister has just mentioned—taxation policy, expenditure policy, pensions policy or anything that would affect the public finances in one way or another.

[Lord Sassoon]

Again, I am advised that the drafting of the amendment would not necessarily achieve that end. If we include “in the light of economic policies”, even if it was widely interpreted, does that mean we should refer also to other aspects of sustainability, such as, for example, the impact of external shocks? I believe that the subsection works, even as drafted. We absolutely agree with both noble Lords in terms of what we expect to be taken into account, but we do not consider that the amendment will help. Its drafting does not do the trick and, I am advised, aims at something which is not necessary because we have it in Clause 5(3).

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[Lord Higgins]

When we consider my amendment which refers to Clause 5(3), I shall make a quite separate point. The noble Lord, Lord Newby, has essentially encapsulated what he wants to say. The problem for the Government is that we are saying that the OBR has to take into account the Government’s economic policy, whereas the noble Lord’s letter—and the debate on that lasted for an hour and 20 minutes on our first day in Committee—was concerned with saying that we must not under any circumstances allow the OBR to look at economic policy.

[Lord Burns]

There is an issue with the drafting of Clause 5 and I wonder whether we are trying to make subsection (3) work too hard for its living. I had assumed that it was there to make sure that the OBR did not get dragged into a political debate and would not be called upon by anyone to cost opposition policies—which, as we know, has become a bit of a habit over the past 25 years—or by a Select Committee to insist that it compared the outcome of the Government’s policies with that of another set of policies. That would inevitably draw the OBR into a political debate. I had assumed that that was the purpose of this subsection, and it may be working it too hard to say that it should also do the job suggested by the noble Lord, Lord Eatwell. I think that the noble Lord, Lord Newby, has captured the spirit of what a number of us have been concerned about.

[Lord Sassoon]

We are all trying to get to the same end. I do not think that this is a rerun of what we were talking about under Clause 1 on the charter for budget responsibility. If it were, I would not carry on with a sympathetic tone. If it is trying to reopen—

Budget Responsibility and National Audit Bill [HL]

Lord Burns Excerpts

Monday 8th November 2010 Lords Chamber

[Lord Burns]

My Lords, I propose to address my remarks to those parts of the Bill that deal with budget responsibility. I, too, fully support the principle of publishing a charter for budget responsibility, including the objectives for fiscal policy and the means by which they would be attained. The challenge is to have a framework that both constrains fiscal behaviour in a responsible way and is capable of dealing with the range of surprises and unexpected events that inevitably occur. All attempts to frame budget responsibility in this way have at some stage met that particular problem—some have dealt with it better than others.

The main innovation in this Bill is the formation of the Office for Budget Responsibility. I agree that this has the potential to increase confidence in the projections and to reduce suspicion that they are modified by government to give the impression of a greater chance of success. I agree with the noble Lord, Lord Turnbull, that support for this independent scrutiny does not require a belief that there is widespread fiddling in fiscal projections. I also agree with him that there is a natural tendency for a Government to believe that their policies have a better chance of success than many sceptics will claim or, indeed, than often tends to be captured by the official forecasting process. Sometimes they are right. On other occasions, they are wrong. Sometimes, they are very badly wrong.

Given the natural degree of uncertainty and error in any projections of this kind, we should not overstate this problem. Interventions by government in projections tend to involve some bias towards optimism. However, it has to be recognised that some of that is to counterbalance a natural bias towards pessimism, sometimes among the officials in the department. We all agree that it is better to remove any doubts about this. I wholeheartedly support the idea of scrutiny and of having an independent office.

When the idea was first mooted, I, along with the noble Lord, Lord Turnbull, were rather attracted by the hope that it might be an audit process—or what he has called a validation model—and that its main role would be to test the validity of assumptions used in the forecast and to concentrate on the question of the prospect for the underlying public finances, taking into account the position of the business cycle. The Government have taken a different approach. This Bill involves outsourcing the responsibility for the published forecasts, including the main economic magnitudes as well as the public finances.

It is no secret that most of the Chancellors with whom I worked had the ambition to hand the responsibility for forecasting to someone else. That is not surprising, given the limitations and the inevitable range of error around any forecasts for output public spending and tax collection. For right or wrong, most Chancellors end up damning forecasts and the requirement to publish them. I will be interested to see whether this new arrangement ends that long history. Personally, I am not sure that having forecasts done somewhere else entirely solves the problem for Chancellors, but that is not the issue for today. The decision has been made. However, we should be in no doubt that forecasts are uncertain—sometimes very uncertain—and that any organisation that builds its reputation on the accuracy of its forecasts is going to have a difficult time on occasions, whether it is inside or outside the Treasury. I fear that that will also apply to the OBR at some stages.

This decision has some important implications for the structure and operations of the OBR. It is something that has to be considered when framing its remit and governance. Many of the details involved in preparing the forecast for the economy—particularly public finances—require a close working relationship with officials, particularly when it comes to public expenditure and taxation. Furthermore, as the Bill requires the forecast to be produced on Budget Day, the OBR has to be an insider as far as the Budget is concerned. Consequently, it will inevitably work closely with the Treasury, which I fear will make it more difficult to have a clear line of separation between the OBR and the Treasury. On occasion this will cause suspicion but I fear that it is a fact of life. Given the OBR’s responsibility in this regard, it is simply not possible to have the degree of separation that some people would like to see. It is an integral aspect of the decision to make the OBR responsible for the forecasts.

I emphasise the whole question of the OBR’s independence. I fear that this will not be secured by putting it into a different building, employing completely new people or giving it unlimited resources. Independence is much more about the quality of the people who are involved and depends crucially on the remit that is given, the clarity of that remit, the governance structure that surrounds the organisation and whether that enables us to see much more clearly the kind of job that it is doing.

To my mind, the biggest danger to the independence of the OBR is if it is dragged into the political debate through being asked to give an opinion on political issues or on issues that cannot be verified by outcomes. I strongly believe that, if these arrangements are to have any chance of working, the OBR should be required to limit its activities to assessing whether the Government’s objectives will be met. I am particularly concerned that it should not be involved in making judgments about hypothetical proposals or in making impossible comparisons with counterfactual outcomes. It should not be pulled into the political debate about the effects of alternative policy. Therefore, it is important that we should be clear not only about the things that it has to do but about the things that it should not be doing. For example, the OBR should not be asked to give a view on the effects of a Budget by comparing that with someone’s alternative Budget, or even with not having a Budget at all. It should not be asked to widen its remit or to give a view on the impact of packages of measures, whether framed by government or opposition. Therefore, like other noble Lords, I am concerned about the open-ended nature of Clause 6 and the ability to move the remit gradually over time, as clarity of remit will be crucial to the body’s success.

It was clear that the interim OBR was handed a virtually impossible task in presenting a pre-Budget forecast shortly before the Budget was published. That opened up the opportunity for analysts to try to interpret from the two what the effect of the Budget would be, which, of course, gets one into deep political debate. I hope that in the future this will not be the case. Therefore, I am anxious that there should not be remit creep. If there is any danger of this, it would be enormously helpful if it could be made clear by the Minister or in the Bill how far the remit can be stretched and what degree of discretion is left with the Treasury to change the remit given to the OBR.

My next point relates to governance. It is proposed to have a chairman and two additional persons who form the Budget Responsibility Committee and who are required to have relevant knowledge or experience. In addition, it is proposed to have at least two persons, who are described in the Explanatory Notes as “non-expert”, as part of that office. I do not find this distinction between experts and non-experts helpful, particularly in this area of forecasting and public finances. It is much more helpful to think of it in the terms mentioned by a number of noble Lords this afternoon—that is, the distinction between executive members and non-executive members of the OBR.

Clearly, the executive members—essentially, there are three experts—make up the Budget Responsibility Committee and are responsible for the published work. However, in my view the Bill should be much more specific about the role of the non-executive members. I suggest that they should not be involved with the published content but should be consulted if any issue of process emerges during the forecasting rounds. Similarly, they should be involved in post-mortems of how the process worked in relation to content and relationships with the Treasury and other relevant bodies. They can give guidance and support the independence of the OBR, if this question ever becomes an issue, and help the executive members to navigate their way through the inevitable issues that will arise from month to month in determining how the remit should work and how they should respond to pressures from the Treasury and to the whole variety of issues that people who have been non-executive directors know come before boards on a regular basis. They should also be involved in setting the OBR’s own budget and adding weight to any issues over resources that the OBR has. Along with a number of noble Lords, I would be grateful to hear from the Minister whether this type of interpretation accords with his view of the role of the non-expert members of the OBR. I agree with others that it would be helpful for the Bill to be much more specific about the role of the non-executive members.

This takes me to my final point, which relates to resources for the OBR. The main weakness of the proposed structure is the dependency of the OBR on the Treasury for resources, both financial and with regard to some of its people. I have no doubt that, in the early days, this will not be an issue, but it could become an issue. This could work either way. Public bodies that work without a budget constraint have a tendency to grow and grow. On the other hand, we know that one way of constraining the independence of any body is to leave it underresourced. Along with the noble Lord, Lord Myners, I agree that some transparency and safeguards need to be built in.

I would like a role to be given to the Treasury Select Committee in another place with respect to resources. For example, the budget for the OBR could be published and scrutinised by the Treasury Select Committee. The OBR should have the opportunity to set out to the committee whether it believes that it has the resources that it needs to meet its remit. If the chairman of the OBR thought that the OBR was being underresourced, there should be an opportunity to raise that question with the committee. Similarly, the committee could have the opportunity of testing whether the budget for the OBR was growing too rapidly. Simply having the finances of the OBR as a part of the Treasury’s expenditure programme may be all right on this occasion, but some years down the line it may not be quite such a comfortable process.

I end by noting that my former colleague, Alan Budd, showed typical wisdom and independence when faced with the difficult task of setting up the interim OBR. I have full confidence in Robert Chote’s ability to carry out this extraordinarily difficult role. The key to making a job of this type work is to be absolutely clear about its remit, the extent of that remit and the governance arrangements that surround it and to ensure the certainty of the organisation with regard to its resources. I fear that confusion in any of these areas will in the end be the biggest danger to independence and to the success of what otherwise I wholeheartedly support.