Budget Responsibility and National Audit Bill [HL]

Lord Higgins Excerpts

Monday 6th December 2010 Grand Committee

Moved by

[Lord Higgins]

22: Clause 4, page 2, line 26, at end insert—
“( ) The Office must publish with its forecasts the assumptions on which they have been based.”

[Lord Higgins]

My Lords, it should be convenient, as has been suggested, that we discuss Amendments 26 and 39 at the same time. This is an important aspect. We are going into a situation where the Government have an official forecast, but a great many other forecasts will be produced at the same time. The helpful document produced by the Treasury, Forecasts for the UK Economy, shows just how many other independent forecasts there are, but the OBR one will clearly have a particular and unique importance. If it is going to be compared with forecasts by other forecasters, we need to know the assumptions on which the official forecast is based, because we all know that the assumptions that are made essentially determine the outcome of the forecast.

I realise that the charter also refers to the assumptions being spelt out but it seemed more convenient in this instance to put that into the Bill. Indeed, I am inclined to think that this is so important that it ought to be in the Bill rather than in the charter. There seems to be general agreement in the draft charter that this should be so, but, I am not clear where these assumptions appear in the first example that we have been given of an OBR report, Economic and Fiscal Outlook—November 2010. It would be helpful if we were told exactly where the Government believe that these assumptions are being spelt out.

The other amendments also relate to what one might in simple terms describe as the “model”. In this context, I am not clear precisely what model is being used. The Treasury had a model, of course, which was published and was used by various outside organisations, including the so-called ITEM group. Are we to understand that the OBR forecast will totally replace the Treasury forecast that used to appear in the Red Book? If so, is the OBR none the less going to use the same model that the Treasury used, or does it have a model of its own? In either case, it would be helpful if my noble friend could place in the Library, or publicise more widely, exactly which individual model is being used; we would then have a better basis for comparing it. Are we also to understand that if the Treasury model disappears, the ITEM group—for the benefit of Hansard, I should point that it is spelt out in capital letters rather than just being referred to as the “item group”—will go on using the Treasury model, or will there be a replacement?

I agree with the opening remarks of the noble Lord, Lord Eatwell, about the importance of getting the technical aspect of these matters straight. The technical arguments are important if the OBR’s forecasts are to have the credibility that they ought to. I would be grateful if my noble friend could respond to those simple points so that we understand where we are going in the future. Perhaps he might point out to me where the assumptions are specified in the November document that was the first example of the OBR’s work.

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[Lord Eatwell]

I agree with the noble Lord that the amount of information that is published has increased, to general benefit. I spent a few happy hours over the weekend playing with the Excel spreadsheets on the OBR website and plugging them in to a model that I use to think about the economy. I found some interesting inconsistencies and will write to Mr Chote about them.

The point that has come up several times in our discussions concerns the balance between the Bill and the charter. The charter can be changed readily, as it is not primary legislation. We must give careful consideration to whether, for example, transparency as defined in the charter gives a sufficiently strong underpinning to the need to reveal information, or whether statements such as those in the amendment proposed by the noble Lord, Lord Higgins, or in those proposed by me and my noble friends, should be in the Bill. This has come up several times. It is an issue that we should take away and consider carefully before Report. Where should we strike the balance between an explanatory charter that gives guidance to the OBR and the statutory requirements? I do not have a firm opinion. However, on this issue I lean toward the idea that it should be in the Bill rather than in content that could later be amended. Of course, it would have to be put before Parliament—we know the charter procedure—but it can be changed. If we really care about this, perhaps we should put it in a form that cannot later be changed. This is a matter for future consideration.

[Lord Higgins]

My Lords, we are grateful to the Minister, who has clarified a number of points. I will come back to an obvious and fundamental one. I am still not in the least clear why we will have both an OBR forecast and an official one from the Treasury that will be useful for Ministers. I simply do not understand this.

[Lord Sassoon]

Perhaps I may clarify that. There will be one official forecast, which the OBR will produce. The Treasury will retain a modelling and forecasting capability, but it is absolutely not the intention, and will not be the case, that there will be another official forecast from the Treasury. Ministers simply require the Treasury to retain that capability, so that if, in circumstances that we do not at all anticipate, the Chancellor or the Treasury want to take a different view from that of the OBR, they will retain the capability of doing so. There is absolutely no intention that there should be anything other than one published forecast, which will be put out by the OBR.

[Lord Myners]

Perhaps I, too, may make a comment. I took the Minister’s reply to the question asked by the noble Baroness, Lady Browning, about situations where there is a difference between HMT’s forecast and the OBR’s forecast as confirming that the Treasury will be clear about the fact that its own forecast was different and that its policy decisions were informed by its own forecast rather than by that of the OBR.

[Lord Higgins]

I find this rather difficult. The Minister raises his eyebrows. I simply do not understand what the purpose of this forecast is going to be. Perhaps I may expand on that for a moment. We had an official forecast and we presume that the Government will operate on that basis, but apparently there is to be an internal forecast on which Ministers will base their decisions. The noble Lord is shaking his head.

[Lord Sassoon]

My Lords, there will not be another official internal forecast. There will be the forecast of the OBR, but that does not mean that the Treasury should not have the capability to—and it will—look at underlying assumptions on which the forecast is based, to make sure that it understands where the OBR is coming from and feels comfortable with it. There will not be some other internal official forecast; there will merely be a capability within the Treasury—and it is important that there should be such a capability—whereby Treasury officials can look at and understand the assumptions on which the OBR’s forecast is made. That will not require, and there is no intention for, the Treasury to produce any separate forecast of its own.

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[Lord Eatwell]

My Lords, from our side, the point is not that that capability should not be there, as it clearly should be. However, confusion was introduced into the discussion by references to a Treasury model and forecasts, which puzzled us all, as opposed to having a capacity to critique and develop the modelling of the OBR.

[Lord Higgins]

My Lords, I understand the argument of the noble Lord, Lord Burns, and I should like to think further about what has been said on this issue.

Perhaps I may raise a further point in relation to the model. Over the past 80 or 90 years, we have had a huge difference of view as to whether one should adopt a Keynesian or a monetarist approach to these problems. My impression is that the OBR now has an essentially Keynesian approach and that the monetary aspect does not appear in the discussion at all, other than to say, “Well, of course, the Bank of England is targeting inflation”, and let it go at that. However, as I have previously pointed out to the noble Lord, Lord Myners, and others, until we got into quantitative easing the Bank was concerned purely about the price of money—the rate of a single rate of interest—rather than the quantity of money.

I am not the least bit clear about the proposal as it now comes here and to what extent the OBR is taking monetary factors into account. Let me illustrate this by giving an example from many years ago. I am delighted to see that the basic approach to economic forecasting on page 28 is to decide on how much excess capacity there is and then to see to what extent aggregate demand gradually increases and absorbs that excess capacity. That was precisely the policy that we adopted in 1970 under the Heath Government. We said then, in the clearest terms, exactly what is being said now on page 28. Unfortunately, this was misinterpreted as a dash for growth and we were absolutely pilloried by those who said that the money supply had been going up very fast. In fact there was a big difference between the money supply, the money supply figures and what was happening to aggregate demand. The point that I am seeking to make is that this does not take into account the effect of quantitative easing, for example, or, if it does, I am not clear where that would appear in these forecasts, although no doubt the Minister can enlighten us.

Given that we are told that the Bank of England is going to make yet a third, quite different, forecast in addition to the, I am almost inclined to say, surreptitious one in the Treasury—I accept fully the point made by the noble Lord, Lord Burns—I am worried that the fiscal and monetary side is not sufficiently integrated in the forecasts.

[Lord Myners]

Further forecasts on the economy are made in government. I believe that the Department for Business also produces its own economic forecasts. Almost as many forecasts are produced in government as are produced in the private sector.

The noble Lord, Lord Higgins, makes an important point. This might not be the right forum in which to discuss this, but the balance of intent behind the decisions currently being made by the Monetary Policy Committee is more focused on the words that come after “and subject to that” in its remit than on controlling inflation—that is to say that, in an environment in which fiscal policy is reducing demand in the economy, the onus for sustaining demand is coming from monetary policy, with considerable risk, in my judgment, of inflation.

There is no recognition in the Keynesian thinking of this document about the importance of monetary policy. We have what the Americans call a saltwater analysis of economics rather than the freshwater or Chicago school analysis associated with the monetarist view. It will be interesting to hear the Minister’s view on where monetary policy comes into the OBR’s thinking.

[Lord Sassoon]

I love it when noble Lords preface their remarks by saying, “This may not be the place in which to discuss these things”, and then go into freshwater and saltwater fishing. The noble Lord, Lord Eatwell, has already said that his study of the 20 spreadsheets has raised some questions that he will address directly to Mr Chote. If my noble friend Lord Higgins would like me to relay his questions to Mr Chote, I will be happy to do so—or he may wish to write directly. Either way, I will return to the amendment. We have so much transparency already that it is provoking lots of questions that I am sure Mr Chote and his colleagues will be happy to answer. I will be happy to act as postman if that would be helpful.

[Lord Higgins]

I gladly accept that offer and beg leave to withdraw the amendment.

Amendment 22 withdrawn.

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[Lord Eatwell]

I thank the noble Baroness, Lady Noakes. It is, as we say, a learning experience.

[Lord Higgins]

It is very simple. You ring up the Whips Office and say, “I don’t like the way in which it has been divided up”.

[Lord Eatwell]

I am grateful for the supervision. However, if we look forward, we will be discussing a set of amendments about which I feel very strongly in the context of reinforcing the powers of the OBR. If those amendments are accepted, that would require this amendment also to be accepted. While withdrawing the amendment at this time, I will be intrigued to see how the noble Lord, who will clearly appreciate the wisdom of my future amendments, manages to square accepting them with rejecting this one. In the mean time, I beg leave to withdraw the amendment.

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Moved by

[Lord Higgins]

30: Clause 5, page 3, line 1, leave out subsection (3)

[Lord Higgins]

My Lords, it may be convenient also to consider Amendments 31 and 32. When I first looked at Clause 5(3), it seemed fairly straightforward. It states that if the Government’s policies are relevant to the OBR’s performance of its duties, the office should not look at any alternative policies; that is, it should not suddenly say, “We want to look at the policies of the Labour Party as well as those of the coalition and make a comparison between the two”. That is what I understood it to say. The alternative proposed in one of the later amendments is rather more stringent than that, in that it effectively provides that the office should not look at any alternative policies at all, while the other amendment says that it should. So, in a sense, we have a choice. On balance, it is arguable that the Government, having reflected on this, came to the view that the OBR should not look at alternative policies, which might create a very confusing situation. Nevertheless, the subsection does seem to be unnecessarily restrictive.

To my surprise, during a discussion in our previous Grand Committee, it turned out that the clause was intended to do something quite other than what it appears in simple terms to do, and we had a lengthy discussion about that. I still do not understand either what the amended interpretation was supposed to do or how it would do it. It would be helpful if the Minister could give us some idea of that now, or alternatively could consider the matter further. However, as it stands, the provision seems to be quite straightforward. I beg to move.

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[Lord Higgins]

I should perhaps have said in my opening remarks that I had, in effect, had second thoughts. It may be that my amendment simply leaves open the question, but we really want to clear it up.

[Lord Peston]

My Lords, I speak to Amendment 32, which is in my name and that of my noble friend Lord Barnett. When I first saw subsection (3), I must say that I was appalled, in particular by the words “may not consider”. This body is supposed to be independent and, unless we are to get a new form of thought police brought in here, can presumably consider anything that it likes. That does not mean that it should be involved in a report on itself. However, to tell a group—at the moment, a group of three expert economists—that what it can think about is limited by an Act of Parliament is absolutely absurd. I draw the Committee’s attention to what “may not consider” means; that you cannot even think or talk about something and that it has nothing to do with you. This is incompatible with the group’s independence and professionalism. I wonder what serious, self-respecting economist would wish to work under those circumstances. I would not, under any circumstances, be willing to work and be told that. I can remember the sad old days in the Treasury when everybody was told that under no circumstances were we ever to discuss or use the word “devaluation”. It did not have any effect: we just did it privately or secretly, and so on. That was the worst example of this that I can remember.

I was appalled by this subsection and I thought that taking out “not” was the best way of dealing with it. However, the method proposed by the noble Lord, Lord Higgins, is better still: take out the whole subsection. It may well be that we could put in another clause of a more positive nature. It is perfectly obvious that the OBR’s job is to consider the whole issue in the context of government policy, because, as the Minister has emphasised—although I slightly disagree with his logic—the OBR is not a decision-making body, it is just a forecasting body. I do not entirely accept that distinction, as noble Lords are aware, but I can at least see the Minister’s position. I accept what my noble friend Lord Eatwell and others have said; that forecasting is the OBR’s main role. There should not be a clause in what will eventually be a statute telling the OBR what it may consider, unless the meaning of “consider” in the English language has changed. My general view is that the approach of the noble Lord, Lord Higgins, was much better than mine or that of the noble Lord, Lord Barnett. We should remove subsection (3).

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[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.

[Lord Higgins]

My Lords, that is a very sensible reaction on the part of the Minister.

[Lord Eatwell]

Before the noble Lord withdraws his amendment, I agree entirely with the Minister that there is a clear degree of consensus on what we are all trying to achieve. However, there is a degree of consensus that Clause 5(3), as currently drafted, does not achieve it. When we have concluded Committee, I intend to write to the Minister about this matter and a number of others where I think that we have total consensus on what we want to achieve and even perhaps to suggest meetings prior to Report to sort it out. That way, everybody can be clear about and comfortable with what we shall in due course pass into law. Having said that, I really do not see how Clause 5(3) can survive as currently drafted but, given that we are now really clear about what we want to do, we can sort something out.

[Lord Higgins]

My Lords, the whole purpose of a Committee stage is to get to the bottom of certain difficult aspects of a Bill. I am sure that it is right that the Minister should look at the matter very carefully between now and Report, in particular with the parliamentary draftsmen. I have no doubt that the noble Lord, Lord Eatwell, and others can look at it as well. It might be helpful to keep in touch on whether we all agree on the amendment to table or whether we should put down alternatives. At all events, I beg leave to withdraw the amendment.

Amendment 30 withdrawn.

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Moved by

[Lord Higgins]

37: Clause 7, page 3, line 16, leave out “aim to”

[Lord Higgins]

My Lords, the amendment, which has a whole clause to itself, is not difficult to understand. The Bill as drafted states:

“The Office must aim to carry out its functions efficiently and cost-effectively”.

The amendment seeks to delete the words “aim to” so that it reads, “The Office must carry out its functions efficiently and cost-effectively”. There would be a loophole if the office could simply say that it was aiming to do this when it may not achieve that objective. More sensibly it should be mandated to operate efficiently and cost-effectively, otherwise it may overspend its budget by an enormous amount and say, “Do not worry, these are unforeseen circumstances. We aim to do it”. I beg to move.

[Lord Sassoon]

My Lords, of course the OBR should be cost-effective and efficient—there is no question about that—and the amendment seeks to increase the requirement for it to be so. However, in reality the amendment would not change in substance the requirement on the OBR because, if it was ever challenged on this point, the challenge would be subject to what it would have been reasonable for the OBR to have done. I agree with my noble friend that it would be nice if we could have more direct language here but I am advised that the amendment would make negligible difference. That is because if it was ever tested in a legal context—one hopes it will not be—the reasonableness of what the OBR had done would be encapsulated in the words “aim to”.

At the risk of the noble Lord, Lord Eatwell, jumping up again, I have to say that this is the same as the requirement on the National Audit Office, as set out in Part 2. It is not necessarily a good defence; I merely observe—

[Lord Sassoon]

Of course, in the wider context, the accounting officer will have to answer for the OBR’s cost-effectiveness and efficiency and it will be subject to the normal governance and scrutiny arrangements for public bodies. Those scrutiny arrangements will include an audit, I say advisedly, by the NAO, which will have the power to examine and report to Parliament on a number of matters, including the economy, efficiency and effectiveness of the OBR.

I thank my noble friend for trying to tease out what is going on here. It has enabled me to ask questions and to establish that the words as originally drafted essentially encapsulate the test that a court would use if the OBR was ever challenged. On the basis that we are trying to arrive at the same point, I hope he will withdraw the amendment.

[Lord Higgins]

It will be a question of it coming not to court but to the NAO, which is dealt with in the second part of the Bill. It seems to me that the office would have been on much stronger ground if it was simply told that it must carry out these functions than if it merely said, “Oh well, if it’s all right, I was aiming to but I’ve failed”. None the less, to a degree I take the point made by my noble friend and I beg leave to withdraw the amendment.

Amendment 37 withdrawn.