Charter for Budget Responsibility

Chris Ruane Excerpts

Wednesday 11th May 2011 Commons Chamber

[Kerry McCarthy]

I shall come in a few moments to some of the Government’s measures that have done precisely the opposite of what the hon. Lady claims. Will the Minister explain why thousands of people with disabilities—people in wheelchairs, people with chronic illnesses and so forth—were protesting outside Parliament today under the banner of the Hardest Hit campaign, supported by reputable charities? Is she saying that being hit by what the Government are doing is a figment of their imagination?

[Chris Ruane (Vale of Clwyd) (Lab)]

Does my hon. Friend think that those blind people and deaf people and the people in wheelchairs who were protesting today are ungrateful to the Tory Government for what they have done?

[Kerry McCarthy]

That certainly seems to be the suggestion. For some, it seems that they should be thankful as they do not realise how well off they are. The Minister has come close to saying that they have “never had it so good” under this coalition Government.

We talked in Committee about the Child Poverty Act 2010, and the Government have since published the child poverty strategy. We pressed for a wider remit for the Office for Budget Responsibility to include scrutinising the Government’s progress under the Act. Although the Government rejected our amendment in Committee, I hope that the Office for Budget Responsibility will consider the proposals again in due course, as tackling child poverty is a crucial element of inter-generational fairness. It is disappointing that the Government do not seem to recognise that. I hope that the OBR will be afforded the necessary discretion to include this aspect in defining its role.

It is highly disputable whether the Government have any mandate from the country for their fiscal policy, especially given that the Deputy Prime Minister led his party into the general election on an entirely different approach. Although setting out fiscal objectives has its advantages, it is clear that the Government are bringing in their targets far too early and cutting spending far too fast, as is demonstrated in the forecast that they will need to borrow £46 billion more than was planned last year because of their failure to promote economic growth successfully. That should prove to the Government that their fiscal mandate is not appropriate to the current economic climate and that a different approach is needed to secure the economy on a sustainable footing. That explains why it is key for the OBR to make wider reference to still fundamentally important economic determinants such as employment and growth.

Ensuring a responsible fiscal policy is clearly beyond the OBR’s remit; instead, it is this House’s responsibility to try to make the Government take heed of its advice. For that reason, the charter’s assertion that the Government

“retains the right to disagree with the OBR’s forecasts”

is a serious concern, especially when reliable forecasts will be so crucial to the forward-looking targets. The Government have made a great song and dance about how the OBR will enhance the credibility of fiscal forecasting because of its independence from the Treasury, and the charter itself states:

“The OBR is designed to address past weaknesses in the credibility of economic and fiscal forecasting and, consequently, fiscal policy”.

However, enabling the Treasury to disregard independent official forecasts would make a mockery of the fundamental purpose of the OBR. It would also lead to dangerous uncertainty about which official forecasts we can and cannot believe, and which should inform fiscal policy. That is relevant to a point raised earlier by the right hon. Member for Wokingham (Mr Redwood). I urge the Minister to clarify the status of the OBR and its forecasts.

According to chapter 4 of the charter, the role of the OBR is to

“examine and report on the sustainability of the public finances.”

During the passage of the Budget Responsibility and National Audit Act, a number of attempts were made to secure a broad definition of sustainability, and to persuade the Government to acknowledge that it was not enough to focus on the deficit in an insular way while ignoring the impact on economic growth, employment, inflation, and other factors that are central to sustainable finances and responsible fiscal policy.

Although the Government rejected our amendment which sought to guarantee a multi-dimensional approach to sustainability, arguing that the OBR should be able to define the concept, the Minister reassured the Public Bill Committee that she intended

“to amend the charter to require the OBR to set out how it will approach sustainability in each of its reports.”––[Official Report, Budget Responsibility and National Audit Public Bill Committee, 1 March 2011; c. 48.]

We therefore welcome the addition of paragraph 4.7 in the final charter, which confirms that

“The OBR will consider a wide range of factors and dimensions relating to the sustainability of the public finances and will be transparent in its approach. More generally, in each report published under its main duty, the OBR will explain the factors taken into account when preparing the report, including the main assumptions and risks.”

That reflects many of the concerns raised in both Houses. The reference to risks is important, given that the Government appear to be blinkered when it comes to the risks that are inherent in their deficit reduction plan.

We are also pleased that chapter 4 refers to projections of GDP, inflation and the labour market. However, the absence of any complementary references in chapter 3 to the Government’s role, or indeed the Act, remains highly disconcerting. It suggests that the Government do not consider such fundamental considerations to be part of their role. I assure the Minister that promoting employment and growth are part of the Government’s responsibilities. Perhaps, in time, the OBR will help them to understand that. More positively, we welcome the inclusion of paragraph 4.13, which confirms the Office’s access to Government information, and the omission of the definitions of “objectively”, “transparently” and “impartiality”, which are terms that the OBR is best placed to define.

We are slightly concerned about the inclusion of paragraph 4.12, which is an additional provision and which states:

“The OBR should not provide normative commentary on the particular merits of Government policies.”

There is a fine line between giving an impartial and informed assessment of the effectiveness of Government policies in achieving the declared objectives, and being seen to pass judgment on their merits. How does the Minister think that such a provision will be policed, and who will be the arbiter of whether the OBR has overstepped the mark?

There is no reference in the charter or the memorandum to the funding of the OBR, which we argued in Committee was critical to its independence, but the charter does refer to the office’s discretion in regard to the timing of its publications, although that seems to be weakened by the requirement for

“a regular and predictable timetable”.

The fact that there have already been doubts about whether reports have been published in time for Prime Minister’s Question Time reinforces the need not only to ensure that the wording of the charter is sufficient but, more important, to ensure that it is followed in both the letter and the spirit.

Our key reservation is that neither the Act nor the charter includes any means of ensuring enforceability. I have already mentioned the get-out clause that allows the Chancellor to ignore the OBR’s reports, but there is also no indication of the consequences of the Chancellor’s failing to meet his obligations under the charter. Will the Minister commit the Chancellor to reporting to Parliament following OBR publications? Most important, will she commit the Treasury to listening and responding to OBR reports in its actions as well as its words?

It is not enough for the Office for Budget Responsibility to tell us whether the Chancellor is acting responsibly—we know that he is not—and it is certainly not responsible to disregard its advice or forecasts, but neither the OBR nor the charter can do anything about that. Only the Chancellor can, and he must realise that a charter that proclaims the credibility of economic forecasting does not remedy the damage caused by the Government’s policies, and does not automatically translate into credible policy.

--- Later in debate ---

[Mr John Redwood (Wokingham) (Con)]

Like all those who have participated in this debate, I welcome the four principal aims identified in chapter 3 of this document. It is exactly right when it says that we need to

“ensure sustainable public finances that support confidence in the economy”.

We see all too many examples within Europe of what happens to countries that lose the confidence of world markets and the world’s bank managers. We see that far from being able to sustain high and rising public spending, such countries end up with far worse cuts, which can be deeply damaging to their public services and social fabric. The Greeks seem to be getting into ever bigger difficulties the more money that is lent to the country on soft terms and the more that their Government fight to contain the deficit. We want to avoid getting into that vicious circle in which a Government raise taxes and cut spending, and the deficit grows because the economy plunges again and the revenues dry up even more. I think that hon. Members on both sides of the House now agree that it is most important that we undertake the work to ensure sustainable public finances.

When I listen to the debate in this House, I sometimes feel that very few people have read the numbers in the Red Book. The Government’s pathway is to borrow more than £480 billion extra over the five years for which they are planning. That is more than the total state debt 10 years ago; it is a massive sum. Some people think that we are going to be paying off the debt or paying off the deficit, but we are not.

This Government have, for understandable reasons, decided that they need to increase public spending in each of the five years of this Parliament so that the impact of their decisions on public services can be gentle—I hope that in many cases it will not be felt in any bad way. As a result of that understandable decision, this massive borrowing has to be undertaken and the public debt will be so much greater at the end of the period. That makes it very important that we stick to the pathway of getting the deficit down, so that each year we borrow a bit less extra than the year before. That is the aim of the strategy. Some people seem to describe it in rather different and more draconian or alarmist ways, but the Government are simply trying to cut the rate of increase in the debt. If all goes well over five years, we will still end up making a far bigger increase in the debt than the total state debt just 10 years ago.

I am delighted that the second aim given in this document is to

“support and improve the effectiveness of monetary policy in stabilising economic fluctuations.”

It is my view that the boom and bust were primarily created by a very badly managed monetary policy over the previous seven to eight years. We had the boom phase, when money was too easy, interest rates were too low and credit expanded too rapidly. Even worse, we had the bust phase, when the market was cleared of liquid funds, when interest rates were too high, and when the then Government were far too tight and jeopardised the financial system itself by pursuing a ridiculously tight money policy at the very point when it was obvious that banks were at risk and the system was in danger of collapse.

[Chris Ruane]

Will the right hon. Gentleman refresh the House’s memory on his advice to the previous Government on the regulation of the banks?

[Mr Redwood]

I can indeed and I am glad that the hon. Gentleman did not dare to repeat the normal falsehood that has often been put about. The advice we gave was that they did not have enough regulatory control over the cash and capital of the banks, that they needed tougher regulation of cash and capital and that their mortgage regulation of process and customer was worthless and would not prevent disasters in the mortgage market. I rest my case: that is exactly what happened. The mortgage banks were not protected by their regulation—it probably made things even worse—and the then Government failed to regulate the things that did matter that could have prevented the crisis. I hope that the hon. Gentleman is put right on that now and will no longer read out the stupid spin lines from the Labour party created by people who clearly had not read the economic report to which he is referring. I was trying to keep this non-partisan, but he has decided to spoil the tone—

[Chris Ruane]

So was I. I was giving the right hon. Gentleman an opportunity.

[Mr Redwood]

I am grateful then. I did not realise that the hon. Gentleman was being so generous.

If we are going to support and improve the effectiveness of monetary policy, I hope the Government will think through how that will work. It is one thing to have a charter to say that we will do this, which is something about which I am very relaxed—it is a laudable aim—but it is another to ask how it will occur. The problem with the conduct of monetary policy—this applied to the previous Government as well as to this Government—is that it is not entirely in the hands of the Treasury. I happen to believe that it is ultimately the responsibility of the Chancellor and the Treasury to conduct an honest money policy that avoids undue booms as well as bankruptcies and busts. That requires judgment.

The main elements of that policy, however, are conducted at the moment by the Financial Services Authority, which determines how much banks can lend and admits it got it wrong in the boom period. I think that the FSA also got it wrong in the bust period and managed to go with the cycle, thereby reinforcing it, rather than leaning against it as it should have done. We also have the Bank of England setting interest rates and having some involvement, but not sole control, over how much money is printed. The Chancellor and the Treasury do not run the whole policy and that could become a problem again in the future if the independent bodies make a mess again, as they clearly did in the boom and bust phases we have recently lived through.

I hope a little more thought will go into how the charter can be implemented. I am sure that my hon. Friend the Minister will agree that whatever the theory about independence might be, as far as the electorate is concerned the people responsible for the state of the economy and therefore the conduct of monetary policy are the elected officials—the Ministers. If Ministers wish to delegate that responsibility to an independent body, they are entitled to do so and the public will be happy with that all the time it works but extremely unhappy if the independent body gets it wrong.

That brings me to my third point. Although I am happy with the aims and principles of the charter, I would caution the Minister that we should not place too much confidence in independence as the only virtue that is needed to get these things right. We have had an experiment with a so-called independent Bank of England for more than a decade now and that has been our worst decade for boom and bust since the 1930s. That is not entirely the responsibility of the Bank of England but it was part of the team that managed to preside over too much boom, too much credit and too much inflation and then over too little credit, too little liquidity and bankruptcies on a scale that none of us in this House had ever seen before. That shows that independence is no guarantee of success.

We also see from the Bank of England that its inflation forecasts have been way out for quite some time—

[Chris Ruane]

What about the growth forecasts?

[Mr Redwood]

I am coming to the growth forecasts, if the hon. Gentleman will be patient. The Bank’s inflation forecasts might perhaps have helped to mislead the previous Government as well as the present one. Those forecasts assumed that we would be somewhere around 2% when of course we have reached 5% or more on the retail prices index and 4.4% on the consumer prices index. Today, we have had another revision to the inflation forecasts from the Bank of England saying that there might be more inflationary pain to come over the summer of this year before we start to see progress back to somewhere near the 2% target.

I wish the Office for Budget Responsibility every success and hope that it will be more successful in its forecasts than the Bank of England has been in recent years. Today, the Bank had to announce not only an upward revision to this year’s inflation but a downward revision to this year’s growth. The OBR has already had to revise down its near-term year’s growth forecast in March of this year compared with its autumn forecast last year.

My worry about the current forecasts is that the assumption that we are going to have three years of above-trend growth over the balance of this Parliament after next year could be optimistic if the world economic slow-down, which is likely next year, continues for any length of time. If the euro crisis gets worse and creates more financial and economic turmoil among our major industrial trading partners on the continent or if there are unforeseen problems with the rate of slow-down in the emerging market economies, which are currently applying tough monetary medicine to try to curb their inflation, it could be that much more difficult to hit those Budget targets. That is all important, because we have as a third aim the laudable idea of a forward-looking target to get the current balance or deficit down and to get a better balance between revenues and expenditure.

I have explained that the five-year strategy assumes a very substantial cash increase in total public spending—around £94 billion from memory—and higher public spending on current account in the last year, compared with Labour’s last year, over this five-year Parliament. The way in which the deficit comes down in the official forecasts is mainly through a big increase in tax revenue. That big increase partly reflects the higher VAT rate and other higher tax rates that have already been imposed, but it mainly reflects the very good growth prospect in which we have three years of well-above-trend growth in the last three years of the period, accelerating from now onwards to that good performance. If there is any disappointment or need for downward revision by the OBR, that is going to throw out the tax revenues and we will therefore be faced with a bigger deficit that will require handling. We hear much debate in the House and in the media about whether the Government are trying to reduce the deficit too quickly, but the House should understand that there are risks the other way as well. If growth and tax revenue do not come through at the scale anticipated, we will be faced with rather more invidious issues to resolve about how to get the deficit down without that great super-boost from the revenue.

The objective for debt management is to minimise over the long term the cost of meeting the Government’s financing needs, taking into account risk. This is exactly the point I am trying to stress in this short debate. So far, the markets like the Government’s strong stance. They are pleased that the Government have regarded deficit reduction as the No. 1 thing they have to do and they are pleased with the OBR’s independent forecast showing that the rate of increase in debt drops off quite nicely over the five-year period. However, they will not be pleased if there is major slippage or if the OBR has been too optimistic, so it is most important that we have the right people in the OBR, that it has good fortune with its forecasts and that it has taken into account the possibility, for example, of a deterioration in the international background, which could have an impact.

In conclusion, I welcome the aims but I hope that the Treasury will consider the following important points. First, we must understand that just because a body is independent, that does not mean it gets things right. The Treasury will have to operate its own scepticism about the forecasts. If the OBR were too optimistic, it would be wise of the Treasury, at least privately, to have done some work on what might happen if the forecasts were too optimistic. One should not always assume that the OBR forecast is the worst case and that life is likely to be better. The Treasury should be very careful about that.

Secondly, the Treasury should do some contingency planning in case the world economy is worse than anticipated and has an impact on growth rates. Thirdly, it should take the opportunity that will be presented by the new regime for controlling the banks, which will be introduced when many powers are passed to the Bank of England, to say that the Treasury and the Chancellor must have a role in all that because it was definitely the regulation of banks and the bad conduct in monetary policy that gave us the huge pain of the past six or seven years. We probably need more intervention from the Treasury and more accountability to the Treasury to try to get the system to work in the future.

The Opposition love to say that the crisis was a global crisis and that therefore one should not blame any particular part of the UK governing establishment. I do not take that view. It was a largely western crisis and there were some advanced economies that were not affected by it. Australia had a particularly good period, China had a pretty good period, and India sailed right through without any problems. There were small and big economies that were not affected by the world crisis, even though global activity was hit, because American, British, Spanish and Irish activity was hit in a very predictable way.

It was a rather limited number of countries that had gross mismanagement of their money supply and their banking systems. As the election is well behind us, we should, in a non-partisan spirit, analyse what went wrong, admit that things went wrong in Britain, and make sure that the new architecture, of which the charter is just part, functions much better than the old architecture. That means questioning the assumption that independent people always get it right. It means understanding the ultimate accountability of the senior elected officials, and it means understanding that sometimes we need to be more pessimistic, at least in our private forecasts, so that we do not discover that our plans do not work.