Budget Responsibility and National Audit Bill [HL]

My Lords, I am most grateful to the Minister for his introduction to the Bill. I shall begin by referring to the second part of the Bill, which deals with the revised arrangements for the re-establishment of the NAO and its relationship with the Comptroller and Auditor-General. I am assured by the Treasury Bill team that, apart from minor drafting changes, this is the same Bill as that introduced by the last Government and lost at the end of the last Parliament. I can therefore begin this afternoon by congratulating the Government on having recognised the wisdom of the Labour Government’s proposals. I may have some small amendments to propose later, when I have had the opportunity to examine the Bill in more detail, but for the moment, with that part of the Bill, I am content. I turn to the real novelty before us: the proposed legislation to establish an independent OBR. We on these Benches regard the idea of an independent Office for Budget Responsibility as a very good idea—perhaps the only good idea that the Government have had so far. We are therefore totally committed to ensuring that the legislation establishing the office is robust and fit for the purpose of establishing an independent office that will become an enduring and credible part of this country’s policy-making apparatus. To that end we apply the following tests to the legislation: first, independence; secondly, credibility; and thirdly robustness—that is, are the structures in place sufficient to maintain independence and credibility among the political storms that will invariably assail the office from time to time? First, on independence, the comparison of the legislation establishing the OBR with that re-establishing the National Audit Office, conveniently contained within the same Bill, reveals that the OBR’s independence is a pale shadow of the independence of the NAO; and, correspondingly, that the independence of the chair of the OBR is a pale shadow of the independence of the Comptroller and Auditor-General. For example, Clause 17(1) makes it clear that the Comptroller and Auditor-General, "““has complete discretion in the carrying out of the functions of that office””." Clause 6(3), by contrast, requires that the OBR must, "““in the performance of its duty … act consistently with any guidance … in the Charter””," as described in Clause 1 of the Bill—which, by the way, incorporates Clause 1(6), stating that that guidance may be modified at any time. Let us remember that this guidance is guidance by the employer, since all OBR funding comes from the Treasury. It is not casual suggestions by a disinterested party. So the guidance of the charter is fundamental to the status of the OBR. It qualifies virtually all the supposed freedom and independence of the organisation. So, when will the charter be available for scrutiny by your Lordships' House? In the absence of the charter, let us examine Clause 1 more carefully. In Clause 1 we read that the charter will outline, "““the formulation and implementation of fiscal policy and policy for the management of the National Debt””." Notable by its absence from the charter is any reference to the economic health of the nation—the level of unemployment, for example. It therefore fails to provide transparent guidance to the OBR concerning the performance of its duties, as set out in Clause 4, to provide fiscal and economic forecasts. Will the Minister tell the House whether the catch-all clause, Clause 1(3), which states: "““The Charter may contain … other material as the Treasury considers appropriate””," will contain guidance as to the economic variables to be included, or, perhaps even more important, those variables to be excluded from the activities of the OBR? More broadly, Clause 1 makes it clear that the guidance of the charter will ensure that all activities of the OBR will be those that ““the Treasury considers appropriate””, save one. At only one point in this whole Bill are independent powers provided to the OBR—that is, in Clause 6(2), which states that, "““the Charter must not make any provision about the methods by which the Office is to make any such forecast, assessment or analysis””." That is it; that is the only independent bit. I do not want to suggest that that method of forecasting is unimportant—of course it is important, and I shall return to it in a moment—but I am certain that the phrase ““an independent Office for Budget Responsibility”” might be expected, in the understanding of ordinary people, to mean much more than that. However, the OBR does not have freedom over what it is to study. It does not even have the freedom apparently suggested by Clause 5(2), which was quoted by the Minister and states: "““The Office must perform that duty objectively, transparently and impartially””." You would think that that was clear. However, that clause is qualified by Clause 6(1)(b), which mandates the provision of guidance as to what subsections (2) and (3) of Clause 5 entail. So the Treasury has to provide guidance on what transparency entails, and even what impartiality means. That does not sound very independent to me. If I have misinterpreted these clauses, may I suggest that the Government amend them to place their interpretation beyond all reasonable doubt? One element of the guidance that we on this side agree with is that in Clause 5(3), which seems to confine the activities of the OBR to consideration of the impact of government policies alone. I am sure it is right that the OBR should not become embroiled in political controversy. However, will the Minister confirm that I have interpreted the clause correctly, because the clause qualifies the scope of the office’s consideration by the words: "““Where any Government policies are relevant … the Office may not consider what the effect of any alternative policies would be””?" I quite see that this may allow work on methodological issues or research into econometric technique, but what about circumstances in which the Government have no policy and hence the qualification no longer applies? Suppose, for example, that the Opposition put forward proposals to reduce the level of unemployment by means of schemes to be funded by the European Union. Could the OBR test these against a base-case scenario, as is the approach of the Congressional Budget Office in the United States? Or would it be prevented from doing so by Clause 5(3)? It is not at all clear. If the role of the OBR is to test government policies alone, why not say so explicitly? Finally, on independence, paragraph 1(c) of Schedule 1 allows for the appointment of no fewer than two members of the office, who are not required to have, "““knowledge or experience likely to be relevant to the performance of the Office’s duty under Section 4””." I suppose we should refer to these as non-executives. Schedule 2, on the other hand, establishes a National Audit Office with a majority of non-executives and a non-executive chairman. The NAO’s non-execs are appointed by the Public Accounts Committee and the OBR’s non-execs are appointed by the Chancellor of the Exchequer, so independence is eroded again. Moreover, the NAO’s non-execs have a clear responsibility, as set out in paragraph 10(2) of Schedule 2, to sustain the complete discretion of the Comptroller and Auditor-General. But a peculiarity of the OBR legislation is that it fails to place any responsibility on these non-execs, other than participating in the preparation of the annual report and in the audit. Since paragraph 12(3) of Schedule 1 explicitly excludes them from any role in the preparation of forecasts, what are these non-execs supposed to do? Make the tea? They certainly do not have the power to protect the independence of the OBR such as it is. Surely that should be the non-executives’ main role. The conclusion must be that this Bill neither establishes the independence of the OBR nor embodies procedures to protect the independence, save in one respect—the forecasting methods used by the committee. Let us now turn to our second criterion, that of credibility. If the OBR were to be truly independent, as we on this side would wish, then it is inevitable that it will become a powerful brand. The access of the office to detailed government information, as described by the Minister, would make its reports the defining landmarks for those interested in economic and fiscal affairs—a very worthwhile achievement. As noble Lords may be aware, economic forecasting is a controversial discipline—an art not a science. Even widely used techniques do not command universal agreement or even respect. Forecasting models inevitably embody contentious theoretical assumptions, and econometric techniques are matters of often heated debate. It is therefore enormously important for the credibility of the OBR that its methods are subject to rigorous peer review and challenge. The first component of this will be transparency. As already noted, the requirement of transparency is qualified by the provision of guidance as to what transparency actually means. However, some of my fears would be allayed if the Minister would guarantee that the data, methods and costings used in the preparation of forecasts will all be published simultaneously with those forecasts in readily accessible electronic form. This is necessary if there is to be informed review and challenge of the OBR's methods. There should also be provision in the Bill for a peer review committee such as that provided in the structure of the US Congressional Budget Office. The peer review committee should be appointed by an independent person—perhaps the president of the Royal Economic Society—subject to the approval of the Treasury Committee in another place. I turn finally to our third criterion: robustness. If the Bill were to establish a truly independent and credible OBR, future Governments would meddle with it at their peril. This is not a matter of the people involved. I have full confidence in the personal integrity and independence of Mr Robert Chote. I declare an interest as he is an active member of the Cambridge college of which I am master. However, the robustness of the OBR should not rest on personalities. That is why the severe limitations placed by the Bill on the OBR's independence, and the lack of any support for the credibility of its methods, indicate that the drafting fails the robustness test. Therefore the Bill fails all three of our tests. The OBR is not meaningfully independent, save in the methods that it uses—and those methods are not buttressed by the credibility of peer review. Failing those two tests, it is not robust. I am prepared to accept that this outcome was not the Government's intention, and that the problems that I have identified are errors of drafting. If that is the case, I assure the Minister that I will be more than willing to work with him to produce a Bill that will establish an independent, credible and robust OBR. Of course, much of that work will be facilitated by sight of the proposed framework agreement between the Treasury and the OBR. Will the Minister confirm that such an agreement is being drafted, and will he tell me when I may have sight of it? This part of the Bill is a failure. It need not be. I have a proposal to put to the noble Lord on behalf of my right honourable friend Alan Johnson, the shadow Chancellor. I propose that, at the end of Second Reading, the noble Lord, on behalf of the Government, should formally withdraw Clauses 1 to 10 of the Bill, and Schedule 1—that is, all material relating to the OBR. The Bill will then become the National Audit Bill, and will, I believe, receive support from all sides of both Houses. An all-party pre-legislative committee of both Houses should then be formed—or such all-party structure as the Government wish—to thrash out an independent, credible and robust structure for the Office for Budget Responsibility. This would be a major step toward increasing democratic accountability and transparency in our country. I hope that the Government will accept my right honourable friend's proposal.